Manufacturing Weakness in U.S. Lingers, but the Worst of the Storm May Have Passed

In October, manufacturing activity in the U.S. hit a 2-1/2-year low. However, an increase in new orders seemed to offer a ray of hope for a sector that had been battered by strength in the dollar as well as continued reductions in spending by energy companies.

However, on Monday, other data indicated a rise in construction spending in September which hints at the economy retaining its position on stable ground, in spite of evidence of cooling in consumer spending.

Analysts maintain that it will be unlikely that the current set of circumstances will influence the Federal Reserve’s decision to raise interest rates this year or not, especially considering that manufacturing accounts for only 12 percent of the economy.

According to John Ryding, the chief economist of RDQ Economics (New York), new orders have provided positive encouragement but export orders are still contracting. This is why it is not expected that the current data on manufacturing will cause the Federal Reserve to raise interest rates.

According to the Institute for Supply Management, its national manufacturing index slipped to its lowest level this month since May when it reached 50.1. In September the index showed a reading of 50.2. The index is maintaining its position just barely over the 50 mark, which is the dividing boundary line between contraction and expansion.

Manufacturers have continued to maintain that the strength of the dollar along with low oil prices are headwinds to the current situation, preventing it from improving. Some indicators such as the new orders sub-index showed signs of improvement when it rose to 52.9 in the last month from 50.1 in September. Unfortunately, though, export orders have continued to decline. There were also slight improvements in backlog orders and supplier deliveries.

Also, there was a reduction in the percentage of customers who feel that inventories were higher than they ought to be as well as a reduction in the stock of unsold goods at factories. An effort to reduce an inventory overhang by businesses has also weighted factory activity. In October, for the first time in six months, the employment index contracted and hit its lowest position since August 2009. This is suggestive of even greater weakness in factory payrolls.

Economist Daniel Silver of JP Morgan also reiterated the same as he stated that the ISM report was consistent with their opinion that while the manufacturing sector is showing signs of being over the worst of the slump, there is still the negative impact of the strength of the dollar to combat.