US manufacturing contracts again in April, but pace slows

WASHINGTON - US manufacturing in April moved away from a three-year low in the previous month as new orders improved slightly and employment rebounded, but activity remained depressed amid higher borrowing costs and tighter credit, which have raised the risk of a recession in 2023.

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 in April.

This supports expectations that the Federal Reserve will raise interest rates by another 25 basis points to a 5 per cent to 5.25 per cent range on Wednesday before potentially pausing its fastest monetary policy tightening campaign since the 1980s.

“The economy will likely slide into recession later this year,” said Dr Jeffrey Roach, chief economist at LPL Financial.

“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 purchasing managers’ index (PMI) increased to 47.1 in April from 46.3 in March, which was the lowest reading since May 2020.

Economists polled by Reuters had forecast 46.8.

It was the sixth straight month that the PMI remained below 50, which indicates contraction.

Activity could remain subdued as the ISM noted that customers’ inventory levels “are now at the low end of the ‘too high’ level”, and “likely not conducive to future output growth”.

Though a separate S&P Global survey showed manufacturing expanding for the first time in six months in April, factories continued to report hesitancy among customers to place orders because of higher prices and economic uncertainty.

The ISM says a PMI reading below 48.7 over a period of time generally indicates the economy is in recession. It said 73 per cent of manufacturing gross domestic product (GDP) was contracting, up from 70 per cent in March.

But it noted that fewer industries declined sharply.

Only two of the six biggest manufacturing industries, petroleum and coal products, and transport equipment, reported growth.

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 per cent of the economy, is 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 in 2023. 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 per cent annualised pace last quarter.

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.

Prices increased despite the fastest supplier delivery performance since March 2009. Higher prices align with government data 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 per cent target, much of it attributed to labour market tightness.

“Today’s print for the prices paid index suggests the disinflationary impulse from goods remains frustratingly slow,” said Mr Tim Quinlan, a senior economist at Wells Fargo.

“That could complicate the Fed’s efforts to get inflation in check.” REUTERS