By Tom Ozimek
America’s manufacturing sector fell deeper into recession territory in May, extending a multi-month slump as experts warn that the U.S. economy faces “clear challenges.”
The Institute for Supply Management (ISM) said in a report Monday that its manufacturing purchasing managers index dropped to 46.0 last month, the lowest reading since May 2020 and the eighth consecutive sub-50 reading.
Any readings below 50 represent recession, with all key sub-components in contraction, including the employment index, suggesting layoff pressures are building.
“In fact, nothing is growing,” ING analysts said in a note. “The one bit of good news is that this is also the case for prices paid, which dropped to 41.8—the lowest seen since December. This suggests producer price inflation should soon drop below 1 [percent] year-on-year.”
Overall, the ISM data “suggests the economy faces clear challenges,” the ING team wrote.
The Producer Price Index (PPI)—which reflects price changes by manufacturers, farmers, and wholesalers—fell by 0.3 percent month-over-month in May to an annualized reading of 1.1 percent, according to the latest data from the Bureau of Labor Statistics (BLS).
The decline in wholesale inflation comes after just over a year of Federal Reserve rate hikes, which have had a cooling effect on the economy, sparking recession concerns.
“The last 3 times ISM Manufacturing was this low, the U.S. economy was in or about to be in a recession,” Charlie Bilello, chief market strategist at wealth management firm Creative Planning, said in a post on Twitter. “You have to go back to 1995-96 to find a lower reading with no recession.”
The Atlanta Fed’s GDP nowcast, a real-time estimate of U.S. economic output, shows the economy growing in the second quarter at 1.9 percent on July 3, down from 2.2 percent on June 30.
Even though Biden administration officials have expressed confidence in the economy and don’t expect a recession, there are signs of cooling.
‘Putting the Brakes On’
The unemployment rate shot up in May from 3.4 percent to 3.7 percent. Wage growth cooled slightly in May as well, with average hourly earnings slowing to 4.3 percent from 4.4 percent.
U.S.-based employers announced more than 80,000 layoffs in May, up from 66,995 in April, according to the latest data from Challenger, Gray & Christmas. That’s up by about 286 percent from the same time a year ago.
In the first five months of 2023, companies announced 417,500 job cuts, a 315 percent increase from the same span a year ago.
“Consumer confidence is down to a six-month low and job openings are flattening. Companies appear to be putting the brakes on hiring in anticipation of a slowdown,” Andrew Challenger, a labor expert and senior vice president of Challenger, Gray & Christmas, said in a statement.
In the first five months of 2023, employers have announced plans to add 101,833 new positions, which is down 83 percent compared to the same period last year and the lowest since 2016.
Policymakers at the Fed have been watching the labor market gauges carefully for signs of impact on the economy of tighter monetary settings. However, with the unemployment rate remaining below the long-term average of 5.72 percent and inflation still well above target, Fed officials have warned more tightening is likely in the pipeline.
“With the Federal Reserve seemingly intent on raising interest rates further, these two interest rate-sensitive sectors—construction and manufacturing—are likely to find things tougher as we head through the second half of 2023, putting even greater pressure on the services sector to generate the growth needed to sustain employment,” ING analysts wrote.
Interest Rates to Push Higher
Federal Reserve Chair Jerome Powell said recently that the U.S. economy should expect tighter monetary settings going forward and that inflation probably won’t return to the central bank’s 2 percent target for a few more years.
“We believe there’s more restriction coming,” Powell told a European Central Bank forum on June 28.
With labor market conditions remaining tight and economic growth generally more resilient than previously expected, Powell said he thinks policy “may not be restrictive enough, and it has not been restrictive for long enough.”
The Fed’s Survey of Economic Projections (SEP) data shows two more rate hikes penciled in this year, with the median policy rate seen rising to 5.61 percent.
The current benchmark Fed funds rate is currently within a range of 5 to 5.25 percent, with investors widely expecting a quarter-point hike at the central bank’s next policy meeting at the end of July.
Powell said at the forum that the Fed would like to see more progress on quashing inflationary pressures, including in labor costs.
“We need to see a better alignment of supply and demand in the labor market and see some more softening and labor market conditions so that inflationary pressures in that sector can also begin to subside,” he stated.
The Fed chief also said he doesn’t expect core inflation, which strips the volatile food and energy components, to return to the Fed’s 2 percent target until 2025.
“It’s going to take some time. Inflation has proven to be more persistent than we expected and not less,” Powell said. “Of course, if that day comes when that turns around, that’ll be great. But we don’t expect that.”
Andrew Moran contributed to this report.