Washington, Feb 2 (BUS): A measure of US manufacturing activity fell to a 14-month low in January amid the outbreak of COVID-19 cases, supporting the view that economic growth lost steam at the start of the year.
But Tuesday’s survey by the Institute of Supply Management (ISM) marks the third consecutive month of signs of improvement in labor performance and supplier delivery. Unfinished business increased at the slowest pace in 15 months and manufacturers remained optimistic about demand, Reuters reported.
However, Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, noted “the shortage of critical feedstock, difficulties in moving products and a lack of direct labor on factory floors due to the COVID-19 Omicron variant.”
“While the start of 2022 is somewhat challenging, it will be a good year for US manufacturing,” said Oren Klashkin, chief US economist at Oxford Economics in New York.
The ISM’s index of national factory activity fell to a reading of 57.6 last month, the lowest since November 2020, from 58.8 in December. A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the US economy.
Economists polled by Reuters had expected the index to fall to 57.5. All six major industries – machinery, food, transportation equipment, computer, electronic products, chemical products, petroleum and coal products recorded moderate to strong growth.
The economy hit a soft spot in December that seemed to continue into early 2022 as coronavirus cases, led by the Omicron variant, soared across the country. The ensuing turmoil in businesses and schools prompted economists to expect a sharp slowdown in job growth in January.
Chemical product makers reported “significant disruptions to our production due to COVID-19 supplier issues limiting their manufacture of key raw materials such as cans and steel chemicals.” Similar sentiments were echoed by counterparts in the manufactured metal products industry.
Transportation equipment manufacturers have complained that “transportation, employment, and inflation issues continue to hamper our supply chain and our ability to serve our customers.” Machine manufacturers said they are constrained by “transportation restrictions and a shortage of manpower from suppliers”.
But makers of non-metallic minerals are seeing a light at the end of the tunnel, reporting that “the supply chain crisis may be fading a little.”
Stocks on Wall Street have been trading pretty flat. The dollar fell against a basket of currencies. Long-term US Treasuries are down.
The economy grew at an annualized rate of 6.9% in the fourth quarter, which helped boost overall growth in 2021 to 5.7%, the strongest performance since 1984. Goldman Sachs economists on Monday lowered their first-quarter GDP growth estimates to a 0.5% rate from 2.0%, citing Omicron and cutting government payments to households.
The forward-looking new orders sub-index in the ISM survey fell to 57.9 last month, the lowest reading since June 2020, from 61.0 in December. This was the second consecutive monthly slowdown in new orders. But customer stocks remain low, which may limit the moderation in order growth.
Replenishing inventories is likely to support industrialization and sustain economic expansion.
The order backlog gauge eased to 56.4%, the lowest since October 2020, from 62.8% in December, suggesting some easing in supply bottlenecks. This was boosted by the supplier delivery metric, which was little changed at 64.6. A reading above 50% indicates slower factory deliveries.
However, prices rose at the factory gate. The survey’s gauge of prices paid by manufacturers rose to a reading of 76.1 from 68.2 in December, indicating that inflation could remain uncomfortably high for a while.
The Federal Reserve said last week it was likely to raise interest rates in March, with economists expecting up to seven increases this year to tame inflation.
Despite the Omicron spread, factories hired more workers last month, with the ISM study’s measure of industrial employment increasing to a 10-month high, although turnover remained high.
We welcome the rise in factory employment amid concerns that non-farm payrolls may decline in January.
According to a Reuters survey of economists, non-farm payrolls likely increased by 150,000 last month after rising by 199,000 in December. Estimates range from a decrease of 400,000 jobs to an increase of 385,000. The Labor Department is due to publish its January employment report on Friday.
But the shortage of workers remains an obstacle. A separate report from the Labor Department showed on Tuesday that job openings increased 150,000 to 10.9 million at the end of December, close to an all-time high of 11.098 million reached in July.
Almost all of the large increases in accommodation and food services, which reported the creation of an additional 133,000 jobs. Layoffs have reached a record low.
“It seems clear from this data that the labor market became more tight at the end of December than was evident in the payroll data in December,” said Conrad de Quadros, chief economic adviser at Brian Capital in New York. “This data suggests that any signs of weakness in job growth in January will not represent weak demand for labor.”
MI