EconoFACTS

October 03, 2022 | 10:45

Fed Tightening Continues to Spook the Economy

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

The U.S. manufacturing sector is slowing? And so is construction spending?

Indeed they are. Let's go through this one at a time.

The 1.9 pt drop in the manufacturing ISM isn't huge, by any accounts, but it was still weaker than expected, and left the index at its lowest level since May 2020 at 50.9. So, yes, the sector is still growing (unlike Germany, France, Italy and the U.K.) but barely. And, only 9 of the 18 industries in this survey reported growth, the fewest since the pandemic's heyday.

The breakdown of the five equally-weighted components didn't paint a particularly upbeat picture either. New orders (an indicator of future activity) were down 4.2 pts to 47.1, the third time in the past four months in the 40-zone (and the lowest since 2020). Production (an indicator of current activity) managed to inch up but just by 0.2 pts and not even close to erasing the combined 4.5 pt decline in the prior two months. Employment fell 5.5 pts to 48.7, landing the component back below the 50 level for the fourth time in the past 5 months. According to the ISM, "a higher number of panelists’ companies pausing hiring through hiring freezes and allowing attrition to reduce employment levels".

Inventories grew a bit to a 2-month high of 55.5.

There was some good news on the inflation front ..... there were fewer delivery delays, and prices paid eased to 51.7, the lowest reading since mid-2020. Remember when this component soared to over 92 last year? Those days have passed .... all of this Fed tightening will have that effect.

The comments were mixed. They were not all gloom and doom, as four of the industries described business and demand as "still strong" and a couple mentioned better supply conditions. But don't get your hopes up: most of the comments revolved around supply chain issues (for both materials and labor). And because of those issues, some manufacturers "are not able to accept any new orders for the rest of 2022". And here was a new one.... "concerns of global economic slowdown are growth .... some customers are pulling back orders" (Chemical Products).

Interesting.

In a separate release, U.S. construction spending slumped 0.7% in August, worse than expected, with a pullback in both residential (1%) and nonresidential (-0.4%). We haven't seen that combo since 2020. July's 0.4% decline was revised to -0.6%, but June's 0.5% decline is now showing a 0.6% increase. This has happened before, where signs change. This is one volatile and revision-prone survey! Be that as it may, it was a little disconcerting to see both public and private spending decline in the month.

Bottom Line: It all comes back to higher borrowing costs and weaker demand. What the Fed is doing is working. The mild recession call still holds.

Table 1 - United States — ISM Manufacturing PMI

(percent reporting)

Source: BMO Economics, Haver Analytics