U.S. manufacturing activity contracted in November for the first time since the early days of the COVID-19 pandemic, as rising borrowing costs stifled demand for goods.
The Institute for Supply Management said on Thursday that its gauge, which measures factory activity, has dropped to 49 from 50.2 in October. It marks the first contraction and weakest reading since May 2020.
Values above 50 represent expansion in the manufacturing sector, which accounts for approximately 11.3% of the US economy, while values below 50 represent contraction.
“The November composite index reading reflects that companies are preparing for lower output in the future,” Timothy Fiore, chair of ISM’s Manufacturing Trade Survey Committee, said in a statement.
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Only two of the six largest manufacturing industries (oil and coal products and transportation equipment) saw growth last month. In total, only six sectors reported growth, while 12 sectors contracted in November.
Meanwhile, the survey’s forward-looking new orders sub-index fell to 47.2, the third consecutive month of contraction.
A measure of the prices paid for materials used during production fell for the eighth month in a row, and input prices fell at the fastest rate since May 2020 – proof that goods inflation may begin to subside as supply chain disruptions recede.
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The indicator comes amid growing fears that the Federal Reserve, which is on its fastest tightening course since the 1980s to crush inflation, will trigger a recession.
So far this year, the Fed has raised the reference federal funds rate from near zero to the range of 3.75% to 4%, and it’s pretty restrictive territory. Fed Chairman Jerome Powell said on Wednesday that the US central bank could reduce the size of rate hikes “by December”, but stressed that there is still more work to be done to cool inflation, which is still near its 40-year high.
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While Powell contends that the so-called soft landing – or “soft” landing – is “very plausible” and “still attainable,” he acknowledged that the road to such an outcome is narrowing.
“At this point we think slowing down is a good way to offset the risks.”