American manufacturers have been squeezed for the past two years by lingering supply-chain disruptions and high interest rates, but the industry finally expanded in March for the first time in 16 months, according to the Institute for Supply Management.
But a resurgence in the industry could complicate the Federal Reserve's ongoing inflation fight, either delaying the first interest rate cut or resulting in fewer cuts this year, some economists say. Interest rates have been at a two-decade high since July, after the Fed raised rates aggressively over the prior year and a half.
ISM's latest purchasing managers index for the US manufacturing sector, a monthly survey that gauges economic activity, rose more than expected in March to a reading of 50.3, the first time the index has registered above 50 since September 2022. A reading above 50 indicates expansion, while anything below reflects contraction.
President Joe Biden has signed into law major spending packages passed by Congress, such as a bipartisan infrastructure bill and the CHIPS and Science Act, allowing manufacturers to spend on new factories to ramp up production.
However, several Fed officials have said in recent speeches that persistent economic strength allows the central bank to remain patient and hold rates steady while they wait for more evidence that inflation is truly headed toward their 2% goal. Consumer prices were up 2.5% in February from a year earlier, according to the Fed's favorite inflation measure.
"In the interim, I think it is smart for the Fed to take our time," Richmond Fed President Tom Barkin said Thursday at an event in Richmond, Virginia. "No one wants inflation to reemerge. And, given a strong labor market, we have time for the clouds to clear before beginning the process of toggling rates down."
San Francisco Fed President Mary Daly was asked Tuesday to directly weigh in on ISM's latest manufacturing data during a moderated discussion in Las Vegas. She said it didn't change her overall assessment of the US economy.
"That is just one data point in the sea of data that we collect," Daly said. "You want to step back and say 'what's been happening?' and there I see that the economy continues to remain very solid. No matter where you look, you see strength."
But the stock market kicked off the second quarter last week on a sour note. Wall Street was spooked by economic data from the prior week showing that price pressures persisted in February and that consumer spending surged that month. Fed Chair Jerome Powell also said that week that the Fed is in no rush to cut rates, a sentiment underscored Thursday by Minneapolis Fed President Neel Kashkari.
"If we continue to see inflation moving sideways, then that would make me question whether we need to do those rate cuts at all," he said during a virtual event Thursday afternoon. His comments triggered a selloff on Wall Street, with the Dow falling more than 500 points.
ISM's manufacturing data added to evidence that the economy remains robust, keeping the Fed on hold.
"This report will make the Fed's job a little trickier, and it will undoubtedly be happy the market is still not anticipating rate changes until June or July, giving it that much more time to continue to watch the data roll in," Richard de Chazal, macro analyst at William Blair Equity Research, said in a note released Monday.
The economy picking up further strength would spook Wall Street because of what it means for interest rates — and some manufacturers say they're optimistic about the future.
"Business activity is up. Many manufacturers are anticipating better business in the second quarter and much better in the third quarter. They are reporting that second-quarter bookings are just starting to ramp up," a wood products manufacturer told ISM in the survey.
Another manufacturer said that they're "expecting to see orders and production pick up for the second quarter."
"Suppliers are working with us to help drive costs down, which will help improve the margin for the rest of the year and deliver growth in 2025," they said.
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