MNI INTERVIEW: Fed Cut Is No Manufacturing Silver Bullet - ISM

U.S. manufacturing will remain in contraction with high prices and a declining workforce, and an interest rate cut from the Federal Reserve at its September meeting is unlikely to help, Institute for Supply Management manufacturing chair Susan Spence told MNI.

"Because you have this unprecedented tariff whiplash with input prices possibly going up double digits depending on the commodity and the country, I'm not certain that the interest rate cut is going to be a silver bullet," she said in an interview.  

In more normal times, a rate cut would make it easier for firms to embark on large capital projects, she said. But in an of "huge uncertainty" around trade policy "it feels like it's being overshadowed and maybe isn't going to have the impact that it would have in the past." (See: MNI POLICY: Fed Takes Measured Approach To Post-September Cuts) 

"If you're in an industry where your input costs could go up 25 or 30% and your order is flat to down, I'm not certain an interest cut, to make a capital investment, is going to (help) in this environment."

The ISM manufacturing PMI increased by 0.7pt to 48.7 in August, slightly below expectations for a larger increase. It was the sixth consecutive monthly reading between 48 and 49. The report showed new orders increasing 4.3pts to 51.4, employment edging 0.4pt higher to 43.8 and the production component declined 3.6pts to 47.8. Prices remained high at 63.7. 

SOFT DEMAND

The new orders gauge in August posted the best result since January but survey respondents were gloomy. "The topline takeaway with only a 0.7 percentage point increase is it was really driven by the new orders subindex," Spence said.

"My feeling is the new order (reading) is not a trend, but a blip. We still have the other demand indicators backlog," she said. "I don't believe that the new order increase driving a slight increase in PMI is anything to get very excited about, because of everything else in the indexes, and most importantly the sentiment."

Spence said she does not expect the new orders subindex to improve in coming months. "I don't see it getting a whole lot better than where it is now until the certainty starts to happen," she said referring to trade policy. "So, I think we're in it for a while."

"We still have this month 89% of our respondents saying that tariffs and the uncertainty and the whiplash has got them frozen. They aren't seeing the demand. In fact, they're seeing soft demand," Spence said. "Panelists are still saying that demand is still softening."

Meanwhile, the employment index inched up slightly but remained at a contractionary 43.8, the seventh month of readings below 50.  Spence noted that for every survey respondent comment related to hiring, there were four regarding reducing head count. "Layoffs are still going on."