US factory activity grows at slowest pace in nearly two years

Manufacturers have become more anxious about supply in the coming months because of new COVID-19 lockdowns in China.

People are seen on the manufacturing floor at the opening of a Mercedes-Benz electric vehicle Battery Factory, marking one of only seven locations producing batteries for their fully electric Mercedes-EQ models, in Woodstock, Alabama, U.S
The survey from the Institute for Supply Management on Monday described manufacturing as remaining 'in a demand-driven, supply chain-constrained environment' [File: Elijah Nouvelage/Reuters]

United States factory activity grew at its slowest pace in nearly two years in April amid a rise in workers quitting their jobs, and manufacturers are becoming more anxious about supply in the coming months because of new COVID-19 lockdowns in China.

The survey from the Institute for Supply Management (ISM) on Monday described manufacturing as remaining “in a demand-driven, supply chain-constrained environment”.

ISM Manufacturing Business Survey Committee chair Timothy Fiore said new coronavirus outbreaks overseas were “creating a near-term headwind for the US manufacturing community”, noting that some manufacturers worried “about their Asian partners’ ability to deliver reliably in the summer months” of June through September.

The ISM’s index of national factory activity fell to a reading of 55.4 last month, the lowest since July 2020, from 57.1 in March. A reading above 50 indicates expansion in manufacturing, which accounts for 12 percent of the US economy.

Economists polled by Reuters news agency had forecast the index rising to 57.6. The second straight monthly decline in the index also reflects spending rotating back to services like travel, dining out and recreation. Government data on Friday showed consumer spending on services increasing by the most in eight months in March, while outlays on long-lasting manufactured goods dropped for a second consecutive month.

Five of the six biggest manufacturing industries – machinery, computer and electronic products, food, transportation equipment and chemical products – registered moderate-to-strong growth. Manufacturers offered a mixed assessment of supply chains.

Makers of chemical products reported that supplier shutdowns in Shanghai and long delays at ports, including in the US, “are still providing supply challenges”. In the food industry, supply chains were described as “still constrained”.

But transportation equipment manufacturers noted “improvements in the supply chain”. Manufacturers of nonmetallic mineral products said “improvements in supply chain are occurring on larger scale items”.

Orders slow

The ISM survey’s forward-looking new orders subindex dipped to 53.5 from 53.8 in March. Goods spending surged as the COVID-19 pandemic restricted movement. With customer inventories running extremely lean for more than 60 months, manufacturing is in no danger of stalling.

The survey’s measure of supplier deliveries rose to 67.2 from 65.4 in March. A reading above 50 percent indicates slower deliveries to factories. Tight supply chains have been exacerbated by Russia’s war against Ukraine, which has boosted prices of oil and other commodities. The lockdowns in China are also not helping.

The survey’s gauge of order backlogs dropped to a reading of 56 from 60.0 in March. It was the second straight monthly decline. There was some encouraging news on inflation. A measure of prices paid by manufacturers dropped to a reading of 84.6 from 87.1 in March. That supports views that overall inflation has either peaked or is close to doing so.

The US Federal Reserve is expected to hike interest rates by half a percentage point on Wednesday. The Fed raised its policy interest rate by 25 basis points in March, and is soon likely to start trimming its asset holdings.

There were fewer workers on factory floors last month. The survey’s measure of factory employment fell to a reading of 50.9 from 56.3 in March. Manufacturers generally reported higher rates of quits compared to the previous months, with fewer saying there had been an improvement in meeting head-count targets. Just over a third expressed difficulty in filling positions, up from 28 percent in March.

There were a near-record 11.3 million job openings at the end of February.

Source: Reuters