U.S. manufacturing has been seemingly impervious to any disruption the pandemic could throw at it. But now, it looks like the sector is cooling and the witches brew of supply chain woes, high inflation and global woes may be combining to stall the sector’s stellar performance.
Earlier Monday, the New York Fed said its Empire State index on manufacturing activity tumbled 36.2 points to a reading of negative 11.6 in May. Leading gauges of orders and shipments slumped.
While cautious with one month’s reading, economists said they are on alert.
“I don’t think this is a report that should generate panic. But you do sense a slowing of momentum and we know there are all these political and economic developments weighing on the U.S.,” said Gregory Daco, chief economist at EY-Parthenon.
Some of the worries are obvious.
Russia’s invasion of Ukraine has hurt the outlook for business on the East Coast while Covid-lockdowns have weakened China’s economy, leading to a slowdown of activity and shipping on both sides of the Pacific.
But a more insidious problem may now be starting — higher inflation could be starting to erode demand.
“That’s going to be the theme for the rest of the year,” Daco said, “higher inflation is eroding business investment and consumer demand.”
One supply-chain executive said last week that there is concern that manufacturers could have over-ordered supplies just so they could get them.
Daco said that doubling-up helped boost orders during the pandemic and now can have a “whiplash” effect on the way down.
“We’ve been hearing from some our clients that there is a hesitancy from back offices in terms of future orders,” Daco said.
While not an immediate worry, down the road six or12 months “you could be in an environment where demand actually slows more significantly than anticipated and inflation pressures also ease more rapidly as a result,” he said.
Other economists like Oren Klachkin at Oxford Economics are taking a wait-and-see approach.
“One month doesn’t make a trends and we look for healthy manufacturing activity through the rest of the year and into 2023,” Klachkin wrote in a note to clients.
“The fundamental backdrop will support continued growth even as the recovery tilts increasingly in-favor of services,” he added.
The Institute for Supply Management will release its next national manufacturing index on June 1. While the index slipped to 55.4% in April, the lowest level since July 2020, it has remained over the 50 level that divides expansion from contraction for nearly two years.
The yield on the 10-year Treasury note
slipped below 2.9% on Monday on concerns about slowing global growth. With interest rates retreating, the Dow Jones Industrial Average
flirted with gains.