US manufacturing shrinks further in January amid interest rates

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US manufacturing shrinks further in January amid interest rates

US manufacturing contracted further in January due to higher interest rates stifled demand for goods, but factories did not appear to be laying off workers in large numbers.

The Institute for Supply Management ISM reported on Wednesday that its manufacturing PMI dropped to 47.4 last month from 48.4 in December. The index was at its lowest level since May 2020 and below the 48.7 mark viewed as a sign of a recession in the broader economy.

Economists polled by Reuters had predicted the index would fall to 48.0. A PMI reading below 50 indicates that there is a contraction in manufacturing, which accounts for 11.3% of the U.S. economy.

The Federal Reserve's rapid interest rate-hiking cycle since the 1980s is undercutting demand for goods, which are mostly bought on credit, as it fights inflation. Manufacturing is hurt by the dollar's appreciation against the currencies of the United States' main trade partners and the softening of global demand. Spending is shifting to services.

The weakness in the ISM was mirrored by a deterioration in the so-called hard manufacturing data. The Fed showed last month that manufacturing production declined at a 2.5% annualized rate in the fourth quarter.

The new orders sub-index of the ISM fell to 42.5 in January from 45.1 in December. This measure has contracted for the fifth month in a row. The backlog of unfinished work has been reduced due to weakening demand and improved raw material supplies.

The supplier deliveries measure went up to 45.6 from 45.1 in December. A reading below 50 indicates faster deliveries to factories. The spread of supply chains early in the COVID-19 epidemic, as millions of Americans worked from home was one of the main drivers of inflation last year.

The combination of better supply and ebbing demand has resulted in a significant decrease in consumer and wholesale inflation, with outright declines in monthly goods prices.

The ISM survey showed that manufacturers' prices rose to 44.5 from 39.4 in December.

For now, factories are holding onto their workers despite demand being under pressure. The factory employment measure of the ISM fell to 50.6 from 50.8 in December. This gauge, which has swung up and down, has not been a good predictor of manufacturing payrolls in the government's closely watched employment report.

According to a survey by the Reuters, manufacturing employment in January was likely to increase by 6,000 jobs, after increasing by 8,000 in December. The non-farm payrolls were projected to have increased by 185,000 jobs last month. The economy added 223,000 jobs in December.