Rising interest rates are hitting manufacturing
The S&P Global Manufacturing Purchasing Managers’ Index was pretty close to flat in September. Meanwhile, a similar measure, the Institute for Supply Management’s manufacturing index, weakened more than expected, with new orders and hiring plans both falling.
And construction spending in August fell for the third straight month and by the largest amount in a year and a half, the Census Bureau reported Monday. That’s thanks to rising mortgage rates, courtesy of the Federal Reserve, but manufacturing is also feeling the effect of rising rates.
Manufacturing has been chugging along briskly coming out of the pandemic, as demand has soared for new houses and cars, electronics, appliances and even dumbwaiters, the little elevators used in factories and office buildings.
Jim Piper’s Chicago-based company, Matot, makes them and he said business has been going well this year.
But “we’re like a lot of other small businesses,” Piper said. “We’re budgeting for 2023 a little more conservatively than we typically might, hoarding a little cash, with the general sentiment of uncertainty in the economy.”
As soon as the Fed started hiking interest rates, construction slowed down. Now, manufacturing is too, said Mark Zandi at Moody’s Analytics.
“Up until now, the manufacturing base has had a number of tailwinds. Now, all those tailwinds will soon start to turn into headwinds,” Zandi said. “Manufacturing is kind of treading water at this point, losing steam, and will be in recession shortly.”
The rate hikes have also made U.S. exports more expensive abroad, said Michael Pearce at Capital Economics.
“And we’ve seen the dollar rise 10% to 15% from where it was this time a year ago, 18 months ago. And that’s a real headwind for the U.S. against its international competitors.”
All of this has made manufacturers and builders more pessimistic about their future sales, according to Holly Wade at the National Federation of Independent Business.
“They’re bracing for this decline, looking to scale back on capital outlays, because of their anticipation of this significant slowdown in the economy,” she said
One bright spot: Supply chain delays and disruptions are easing, which should lower inflation going forward.
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