According to Reuters, U.S. manufacturing remained subdued and lost momentum in November, as hiring slowed, and layoffs increased after solid growth the previous quarter.
The Institute for Supply Management (ISM) survey was released on Friday, coinciding with data released on Thursday that indicated a slight increase in consumer spending and a decline in inflation in October. As higher interest rates restrain demand, economic activity is decreasing. Notwithstanding, most economists do not anticipate a recession in 2019 and think the Federal Reserve will be able to implement the much-needed "soft landing." Federal Reserve Chair Jerome Powell expressed satisfaction at Atlanta's Spelman College, saying the economy produces the desired results.
Industry Dynamics
According to the Institute for Supply Management (ISM), the manufacturing Purchasing Managers' Index (PMI) stayed at 46.7 last month. The PMI has remained below 50 for 13 months, indicating a slowdown in the manufacturing sector, which has had a prolonged contraction lasting longer than it has since August 2000- January 2002.
Some Economists believe that the concluded United Auto Workers (UAW) strike in late October still influences the PMI. According to the ISM survey, the prospect of a swift recovery is dim, where manufacturers primarily characterized their inventories as bloated.
In analyzing the situation, macro strategist Will Compernolle from FHN Financial in New York suggested that this situation indicates an overestimation of demand in the goods sector. Consequently, there is a likelihood of a further slowdown in production over the next few months. This slowdown could also be attributed to the lingering effects of the strike, particularly if auto parts accumulated during the production hiatus. Economists had anticipated a slight increase in the index to 47.6 as recently surveyed by Reuters. The Institute for Supply Management (ISM) notes that a PMI reading below 48.7 typically signals an economic contraction, but despite this, the overall economy grew at a 5.2% annualized rate in Q3.
Last month, growth was observed in three industries: food, beverage, and tobacco, transportation equipment, and nonmetallic mineral products. However, 14 industries reported contraction, including paper products, electrical equipment, appliances, computer and electronic products, machinery, and miscellaneous manufacturing.
Manufacturers' Concerns
Manufacturers expressed concerns, emphasizing the need to reduce inventory levels. Some sectors noted a significant slowdown, with makers of computer and electronic products mentioning a notable economic deceleration. Miscellaneous manufacturing firms reported inflated end-of-year inventory due to delayed customer orders extending into Q1 2024, resulting in excessive stock.
Producers in the food, beverage, and tobacco sectors cited executives' directives to decrease inventory, leading to substantial customer shortages substantially. Fabricated metal products manufacturers highlighted the continued impact of the UAW strike on automotive sales, waiting for orders to come in.
While the PMI suggests manufacturing weakness, accounting for 11.1% of the economy, other indicators paint a more positive picture. Orders for durable goods have risen significantly year-on-year, and factory production has remained resilient, excluding the effects of the UAW strike. Senior economist Jonathan Millar at Barclays in New York cautioned against inferring vital deterioration from the ISM composite unless it deviates from this year's range, which fluctuated between 46.3 in March and a short-lived high of 49.0 in September. Wall Street stocks were trading higher, the dollar declined against a basket of currencies, and U.S. Treasury prices experienced an increase.
Strong Construction Spending
The latest report from the Commerce Department's Census Bureau indicates a substantial increase in construction spending for October, primarily driven by single-family homebuilding. Despite emerging signs of a slowdown, economists, including Jeffrey Roach, Chief Economist at LPL Financial, suggest that opportunities still exist in the markets, especially considering the positive state of the housing market for homebuilders. The forward-looking new orders sub-index of the ISM survey saw a modest increase to 48.3 from October's 45.5, suggesting a cautiously optimistic outlook. Although factory inventories remained low, the gauge of stocks at customers reached the upper end of an optimal range. According to Conrad DeQuadros, Senior Economic Advisor at Brean Capital, leading indicators, including new orders and customer inventory levels, don't signal an immediate upturn but don't indicate pervasive manufacturing weakness associated with a recession.
Mixed Signals on Prices and Inflation
While factory input prices saw a subdued but no longer falling pace, the survey's measure of fees paid by manufacturers rose to 49.9, the highest in seven months. Overall inflation is slowing, with the slowest annual increase in over two and a half years recorded in October, as reported by the government. This trend contributes to optimism that the Federal Reserve may have concluded its rate hikes, with markets anticipating a potential rate cut in mid-2024.
Challenges in Factory Employment
Factory employment declined for the second consecutive month, with the ISM reporting increased attrition, freezes, and layoffs as measures to reduce headcounts. The survey's gauge of factory employment dropped to 45.8 from 46.8 in October. This decrease occurred before forecasts for a rise in manufacturing payrolls in November, especially since about 33,000 striking UAW members resumed work in November following a 35,000 employment decline in October.
Reuter's initial survey predicts the total nonfarm payrolls for November will increase by 170,000 jobs after rising 150,000 in October. The employment data for November will be made public by the government on Friday.
