Manufacturing Activity Contracts for First Time in Two Years

FILE PHOTO: Autonomous robots assemble an X model SUV at the BMW manufacturing facility in Greer, South Carolina, U.S. November 4, 2019. REUTERS/Charles Mostoller/File Photo
December 1, 2022

WASHINGTON (Reuters)—U.S. manufacturing activity contracted for the first time in 2-1/2 years in November as higher borrowing costs weighed on demand for goods, but a measure of prices paid by factories for inputs fell for a second straight month, supporting views that inflation could continue trending lower.

The Institute for Supply Management (ISM) said on Thursday that its manufacturing PMI fell to 49.0 last month. That was the first contraction and also the weakest reading since May 2020, when the economy was reeling from the initial wave of COVID-19 infections, and followed 50.2 in October.

A reading below 50 indicates contraction in manufacturing, which accounts for 11.3% of the U.S. economy. Still, the index remains above the level that is typically associated with a recession in the broader U.S. economy. Economists polled by Reuters had forecast the index sliding to 49.8.

The Federal Reserve is in the midst of what has become the fastest rate-hiking cycle since the 1980s, as it battles inflation, raising the risks of a recession next year.

Fed Chair Jerome Powell said on Wednesday the U.S. central bank could scale back the pace of its rate increases "as soon as December." The Fed has raised its policy rate by 375 basis points this year from near zero to a 3.75%-4.00% range.

Manufacturing is also being pressured by the rotation of spending back to services from goods as the nation moves away from the pandemic.

The ISM survey's forward-looking new orders sub-index dropped to 47.2, remaining in contraction territory for a third straight month. Order backlogs also dwindled further also a function of improving supply chains.

The survey's measure of supplier deliveries rose to 47.2 from 46.8 in September, which was the first decline below the 50 threshold since February 2016. A reading below 50 indicates faster deliveries to factories.

With supply chain bottlenecks easing, the outlook for inflation is improving. A measure of prices paid by manufacturers fell to a 2-1/2 year low of 43.0 from 46.6 in October. The drop, which also reflected a moderation in commodity prices, offers hope that inflation has already peaked.

Annual consumer prices increased below 8% in October for the first time in eight months.

The ISM survey's measure of factory employment decreased to 48.4 from 50.0 in October. The decline is likely because of slowing demand for labor as manufacturers brace for economic turbulence.

The government reported on Wednesday that nondurable manufacturing job openings decreased by 95,000 at the end of October, contributing to a drop in overall vacancies in the economy. Still job openings remain considerably high and there were 1.7 openings for every unemployed person in October.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)