U.S. manufacturers continue to grapple with a protracted slowdown that began in the middle of 2022, marked by a decline in business activity for 14 consecutive months. The prolonged slump is attributed to the waning impact of pandemic-driven merchandise buying and the shift in consumer spending towards services. While merchandise inventories have started to normalize, manufacturers face challenges, particularly in expensive business equipment and consumer durables, due to elevated borrowing costs resulting from substantial interest rate hikes – the largest in four decades.
Institute for Supply Management (ISM) Data: The ISM’s purchasing managers index increased marginally to 47.4 in December, but it has been below the 50-point threshold indicating contraction since November 2022. This 14-month downturn in business activity is the longest since the recessions in 2001 and the early 1990s.
Manufacturing Output and Distillate Fuel Oils: Manufacturing output has remained essentially flat for about a year, according to data from the Federal Reserve. Sales of diesel and other distillate fuel oils used by manufacturers have also been stagnant or slightly lower for a year.
Global Industrial Recession: The industrial recession has been more prolonged and deeper in Europe and China. In the eurozone, the manufacturing purchasing managers index (PMI) has been below 50 points for 18 consecutive months. In China, the official manufacturing purchasing index has been below 50 points for 16 of the past 22 months.
Impact on Inflation and Interest Rates: The global industrial recession has contributed to decelerating inflation across major economies over the past year. Higher interest rates have had a more immediate impact on the merchandise side of the economy than on services.
Potential Central Bank Response: If the industrial slowdown persists, it could create room for central banks to consider cutting interest rates over the course of 2024. However, challenges include the uncertainty of lower rates stimulating merchandise spending and tightening supply chains, along with persistent inflation in the service sector.
Oil Prices and OPEC+ Actions: The dour outlook for manufacturing explains why oil prices have continued to slide even as traders bet on earlier, more aggressive rate cuts. Efforts by Saudi Arabia and OPEC+ to support oil prices through output reductions face headwinds amid the prolonged manufacturing slowdown.
The challenges faced by U.S. manufacturers underscore the complexities of managing interest rates, inflation, and economic growth, with potential implications for central bank policies and global energy markets.