- Manufacturing activity contracts for the fourth straight month
- Orders are improving but still remain low
- A measure of the prices factories pay for input rebounds
WASHINGTON, March 1 (Reuters) – US manufacturing contracted for a fourth straight month in February, but there were signs factory activity was beginning to stabilize, with some level of new orders surpassing 2 1/2 years declined low.
Wednesday’s Institute for Supply Management survey also showed that commodity prices have risen over the past month, which the ISM attributed in part to “a return to more balanced supplier-buyer relationships” as sellers are more interested in closing order books fill, and buyers are now seeing the need to reorder.”
The survey also pointed to buyer resistance to higher prices. Still, the factory gate price rally suggests inflation could remain elevated for a while after monthly consumer and producer prices spiked in January.
“Manufacturing continues to contract, but not at a fast enough pace to suggest a broader economic recession at this point, while commodity prices appear to have risen,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.
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The ISM manufacturing purchasing managers’ index rose to 47.7 last month from 47.4 in January. The small increase was the first in six months. Economists polled by Reuters had forecast the index to rise to 48.0. A PMI reading below 50 points to a slowdown in manufacturing, which accounts for 11.3% of the US economy.
Only four industries, including transportation equipment and electrical equipment, appliances and components, saw growth last month. Paper products, textile mills, furniture and related products, and non-metallic mineral products, computer and electronics products were among the 14 reports of a decline.
Stocks on Wall Street traded lower as traders placed bets that the Federal Reserve would continue raising interest rates and keep them at higher levels for a while. The dollar fell against a basket of currencies. US Treasury yields rose.
ISM PMI
WORST BEHIND
But the worst could be over for production. So-called hard factory production data was solid in January, while corporate spending on equipment appeared to have recovered earlier in the first quarter. Comments from some manufacturers in the ISM survey support this thesis.
Manufacturers of computer and electronic products reported a “good start to the year for bookings”. The transportation equipment makers said that “sales remain solid and most assembly plants are operating at full capacity.” Primary metal producers described business conditions as “still strong” but noted that “stockpiling has exceeded our planned levels”.
However, food makers said they expect “the first half of 2023 will be slower than the second half in the US.”
As chances increase that the Fed could hike rates further into the summer, a turnaround in manufacturing looks unlikely.
The US Federal Reserve has raised interest rates by 450 basis points from near zero to a range of 4.50% to 4.75% since last March. Two more rate hikes of 25 basis points are expected in March and May, although financial markets are betting on another hike in June.
Manufacturing is also being eroded by the dollar’s earlier appreciation against the currencies of the United States’ major trading partners and slowing global demand.
The ISM survey’s forward-looking new orders sub-index improved to 47.0 last month from 42.5 in January, the lowest reading since May 2020. Timothy Fiore, Chair of the ISM Manufacturing Business Survey Committee, said, “New order rates remain due to delays over disagreements between buyers and suppliers over price levels and lead times.”
This suggests that buyers were holding back some of their suppliers’ price hikes. Walmart Inc (WMT.N) last month warned major packaged goods manufacturers that they could no longer stand their price hikes.
The order situation also improved, although the backlog of work in progress remained small. The measurement of supplier shipments in the survey is little changed at 45.2, the fastest supplier shipment performance since March 2009. A score below 50 indicates faster shipments to factories.
Stretched supply chains at the start of the COVID-19 pandemic were a key driver of inflation last year. Despite improving supply and falling demand, inflation flared up.
The ISM survey measure of prices paid by manufacturers recovered to 51.3 in February from 44.5 in January, breaking through 50 for the first time in five months.
“This is a potential concern in that it signals that recent economic resilience is putting renewed pressure on inflation,” said Andrew Hunter, deputy chief US economist at Capital Economics. “But this index is still consistent with a sharp decline in headline CPI rate.”
Its factory employment gauge fell to 49.1 from 50.6 in January. But that metric, which fluctuated up and down, wasn’t a good proxy for manufacturing payrolls in the government’s closely watched jobs report. Factory payrolls have been growing at a solid pace for the most part.
Other Commerce Department data showed that construction spending fell 0.1% in January as investment in single-family home construction continued to fall. The housing market was hurt by the Fed’s aggressive monetary tightening.
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Reporting by Lucia Mutikani; Edited by Chizu Nomiyama, Paul Simao and Andrea Ricci
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