US manufacturing contacts again in April but pulls off 3-year low

By Lucia Mutikani

WASHINGTON(Reuters) -U.S. manufacturing pulled off a three-year low in April as new orders improved slightly and employment rebounded, but activity remained depressed amid higher borrowing costs and tight credit, which have raised the risk of a recession this year.

Despite the weakness in factory activity and demand for goods reported by the Institute for Supply Management (ISM) on Monday, there was a build-up of inflation pressures last month.

This supports expectations that the Federal Reserve will raise interest rates again on Wednesday before potentially pausing the U.S. central bank’s fastest monetary policy tightening since the 1980s.

“The economy will likely slide into recession later this year,” said Jeffrey Roach, chief economist at LPL Financial (NASDAQ:) in Charlotte, North Carolina.

“The persistent pricing pressure on manufacturers should abate in the coming months. Still, the Fed will likely hike rates this week and perhaps start telegraphing their likely decision to pause the rate-hiking campaign later this summer.”

The ISM said its manufacturing PMI increased to 47.1 last month from 46.3 in March, which was the lowest reading since May 2020. Economists polled by Reuters had forecast the index climbing to 46.8.

It was the sixth straight month that the PMI remained below the 50 threshold, which indicates contraction in manufacturing. The ISM said 73% of manufacturing gross domestic product was contracting, up from 70% in March. But it noted that fewer industries contracted sharply.

The proportion of manufacturing GDP with a composite PMI calculation at or below 45 percent – a good barometer of overall manufacturing weakness – was 12 percent in April, compared to 25 percent in March, said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee.

Only two of the six biggest manufacturing industries, petroleum and coal products as well as transportation equipment, reported growth last month.

U.S. stocks were trading higher. The dollar gained versus a basket of currencies. U.S. Treasury prices fell.

MIXED RESPONSES

In addition to the higher interest rates and tighter lending standards by banks following the recent financial market turmoil, manufacturing, which accounts for 11.3% of the economy, also being dragged down by a shift in spending away from goods, typically bought on credit, to services.

Businesses are cutting back on restocking in anticipation of weaker demand later this year. The government reported last week that private inventory investment fell in the first quarter for the first time since the third quarter of 2021.

Business spending on equipment contracted for a second straight quarter, helping to restrain economic growth to a 1.1% annualized pace last quarter.

Responses from businesses in the ISM survey were varied. Makers of computer and electronic products said after investing “heavily to de-risk the supply chain over the last three years due to COVID-19,” they were “looking to reset with a number of our suppliers to reduce inventory.”

Transportation equipment manufacturers described business as “steady,” while makers of miscellaneous products said “business conditions remain strong, with sales and bookings exceeding plan.” Primary metals makers described themselves as being “in a season of contradictions,” noting that “business is slowing, but in some ways, it isn’t.”

Food, beverage and tobacco products manufacturers reported that “after consecutive years of inflation and aggressive pricing to our retailers, we are starting to see resistance in the willingness to pass along pricing to end consumers.”

The ISM survey’s forward-looking new orders sub-index rose to 45.7 last month from 44.3 in March. Even though demand remained sluggish, inflation at the factory gate picked up. The survey’s measure of prices paid by manufacturers rebounded to 53.2, the highest reading since last July, from 49.2 in March.

That aligns with government data last Friday showing wages and salaries in the manufacturing industry growing solidly in the first quarter.

Though overall inflation is subsiding, underlying price pressures remain too strong to be consistent with the Fed’s 2% target, much of it attributed to labor market tightness.

The survey’s gauge of factory employment rebounded to 50.2 last month from 46.9 in March. Manufacturing payrolls in the government’s closely watched employment report have essentially stalled, posting small declines in February and March.

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