US manufacturing falls to lowest level since May 2020

US manufacturing activity grew at its slowest pace in almost two and a half years last month, according to the Institute for Supply Management.

People are seen on the manufacturing floor at the opening of a Mercedes-Benz electric vehicle Battery Factory, marking one of only seven locations producing batteries for their fully electric Mercedes-EQ models, in Woodstock, Alabama, U.S
Higher borrowing costs are undercutting spending on big-ticket items such as household appliances and furniture [File: Elijah Nouvelage/Reuters]

United States manufacturing activity grew at its slowest pace in nearly two and a half years in September as new orders contracted while interest rates were aggressively hiked to cool demand and tame inflation.

The Institute for Supply Management (ISM) said on Monday that its manufacturing purchasing managers’ index or PMI dropped to 50.9 in September, the lowest reading since May 2020, from 52.8 in August.

A reading above 50 indicates expansion in manufacturing, which accounts for 11.9 percent of the US economy. Economists polled by Reuters news agency had forecast the index slipping to 52.3.

Some of the slowdown in manufacturing reflects the rotation of spending from goods to services. Government data last Friday showed spending on long-lasting manufactured goods barely rose in August, while outlays on services picked up.

The US Federal Reserve has since March hiked its policy rate from near zero to the current range of 3 percent to 3.25 percent, and last month signalled more large increases were on the way this year.

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The higher borrowing costs are undercutting spending on big-ticket items such as household appliances and furniture, which are typically bought on credit.

The ISM survey’s forward-looking new orders subindex fell to 47.1 last month, also the lowest reading since May 2020, from 51.3 in August. It was the third time this year that the index has contracted. Order backlogs are also being whittled down. While that pointed to a further slowdown in manufacturing, it was also a function of easing bottlenecks in the supply chain.

The ISM’s measure of supplier deliveries fell to 52.4 from 55.1 in August. A reading above 50 percent indicates slower deliveries to factories.

With supply chains loosening, inflation pressures at the factory gate continued to subside.

A measure of prices paid by manufacturers dropped to 51.7, the lowest reading since June 2020, from 52.5 in August. The continued slowdown is being driven by retreating commodity prices. Annual consumer and producer inflation decelerated in August, raising hope that prices had peaked.

The ISM survey’s measure of factory employment dropped to 48.7 from a five-month high of 54.2 in August. It was the fourth time this year that the index has contracted. The index has been a poor predictor of manufacturing payrolls in the government’s closely watched employment report. Those have consistently grown despite the gyrations in the ISM employment gauge.

Though job growth is slowing, demand for workers remains strong. There were 11.2 million unfilled jobs across the US economy at the end of July, with two job openings for every unemployed worker.

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Source: Reuters

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