Rising Prices and Falling Orders Put U.S. Manufacturers in a Bind

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U.S. manufacturers are seeing their costs jump again while their order books decline, presenting members of the Federal Reserve with an unsavoury macroeconomic mix to deliberate.

On the eve of the Fed's May 01 interest rate decision, the ISM Manufacturing PMI was reported to have fallen into contractionary territory at 49.1 in April, down from 51.4 in March, undershooting expectations for 50.3. The New Orders component of the business survey slumped to 19.4 from 51.4.

"The fall in the ISM manufacturing index back below the theoretical 50.0 no-change level in April suggests that the nascent recovery in the manufacturing sector may already have gone into reverse," says Stephen Brown, Deputy Chief North America Economist at Capital Economics.

The ISM manufacturing prices component surged to 60.9 from 55.8 previously, exceeding estimates for a 55.5 reading. This signals inflationary pressures are again building in the supply chain, which tends to be reflected in rising costs for consumers in later months.

"The prices paid sub-index continued its rise, hitting 60.9 in the month, its highest level since the middle of 2022, and could send a signal that goods prices could be on the rise again in the future," says Ali Jaffery, an economist at CIBC.

Members of the Fed are currently discussing their next policy moves, with the decision due for release at 19:00 BST.

Rising prices in manufacturing came a day after it was reported that the employment costs facing businesses unexpectedly rose in the first quarter of the year, leaving little scope for the Federal Reserve to consider cutting interest rates.

"The spectre of inflation looms large. Rising prices for goods and services, coupled with supply chain bottlenecks, have fueled fears of sustained inflationary pressures. The Federal Reserve faces the delicate task of balancing its dual mandate of promoting maximum employment and price stability amid this uncertain economic landscape," says Daria Trubichyna at Pandadoc.

Other data from the U.S. out on May 01 pointed to ongoing resilience elsewhere in the economy. The ADP labour market report showed that America created 192K new jobs in April, above the forecasted 179K and following +208K in March (revised from 184K).

Overall, there was a slight slowdown in wage growth to 5% year-on-year from 5.1% a month earlier.

These suggest the jobs market remained strong in April, raising expectations for another solid non-farm payroll on Friday.

Elsewhere, U.S. job openings eased slightly in March, according to the JOLTS report. The 8488K outcome undershot the 8680K outcome that was expected but remains at levels that aren't consistent with a deteriorating labour market.

The Fed would want to see the market deteriorate before cutting interest rates, as job losses tend to be deflationary.

"Ultimately, the Fed may want to see somewhat looser labor market conditions or excess supply in the labor market to feel confident that inflation will sustainably get to target," says Jaffery.

The number of job openings per unemployed person fell to 1.3, which is still above a pre-pandemic range of 1 to 1.2.

Jaffery says the quits rate, which is a leading indicator of wage growth, moved down one notch to 2.1%, which is below its pre-pandemic pace, and is more evidence that workers are less confident about switching jobs.