WASHINGTON (Reuters)—U.S. manufacturing activity grew at its slowest pace in nearly 2-1/2 years in September as new orders contracted amid aggressive interest rate increases from the Federal Reserve to cool demand and tame inflation.
The Institute for Supply Management (ISM) survey on Monday also showed a measure of factory employment contracted last month for the fourth time this year. ISM Manufacturing Business Survey Committee chair Timothy Fiore said "companies are now managing head counts through hiring freezes and attrition to lower levels, with medium- and long-term demand more uncertain."
Fiore, however, noted that there were no comments from firms about large-scale layoffs, which he said indicated that "companies are confident of near-term demand." The Fed's tighter monetary policy campaign has raised fears of a recession next year, igniting a sharp sell-off on the stock market.
"The good news is that there are welcome signs that prices are stabilizing," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.
"The bad news is that consumer demand for a broad swathe of goods continues to shrink, another sign that the economy is feeling the effects of high inflation, rising interest rates, and a broad-based slowdown in activity."
The ISM's manufacturing PMI dropped to 50.9 this month, the lowest reading since May 2020, from 52.8 in August. It said the fall in the index "reflects companies adjusting to potential future lower demand." A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the U.S. economy.
Economists polled by Reuters had forecast the index slipping to 52.3. Nine manufacturing industries, including machinery, transportation equipment, and computer and electronic products reported growth last month. Furniture and related products as well as textile mill and wood products were among the seven industries reporting a contraction last month.
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 rising in August, while outlays on services picked up.
The U.S. central bank has since March hiked its policy rate from near zero to the current range of 3.00% to 3.25%, and last month signaled more large increases were on the way this year.
The higher borrowing costs are undercutting spending on big-ticket items like household appliances and furniture, which are typically bought on credit.
Transportation equipment manufacturers said "production is steady, allowing reduction of backlog amidst slightly softened demand." Makers of fabricated metal products reported that "business is flat to down due to inflation and interest rates."
Makers of electrical equipment, appliances, and components said "business continues to be strong."
U.S. stocks were trading higher. The dollar fell against a basket of currencies. U.S. Treasury prices rose.
FACTORY EMPLOYMENT WEAKENING
The ISM survey's forward-looking new orders sub-index 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 and inventory levels at manufacturers and their customers are close to normal levels.
While shrinking backlogs 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, the lowest reading since December 2019, from 55.1 in August. A reading above 50% indicates slower deliveries to factories.
Supply views were mixed. Electrical equipment, appliances, and components manufacturers said "some commodities within the supply chain are starting to stabilize, while others are still causing disruption for production."
Machinery manufacturers reported that "supply chain constraints on many items are still an issue," also noting that "staffing on the production side continues to be a significant problem." But makers of computer and electronic products reported that "supply chain issues for all electronic components and custom build-to-print materials are in short supply due to capacity and skilled labor shortages."
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. Though the index has contracted four times this year, has been a poor predictor of manufacturing payrolls in the government's closely watched employment report, which have consistently grown despite the gyrations in the ISM employment gauge.
While job growth is slowing, demand for workers remains strong. There were 11.2 million unfilled jobs across the economy at the end of July, with two job openings for every unemployed worker.
(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama)