U.S. Factory Gauge Dips to Nine-Month Low as Prices Pick Up

(Bloomberg) -- U.S. manufacturing expanded last month at the slowest pace since July, while prices paid for materials continued to accelerate amid supply constraints and tariff concerns, data from the Institute for Supply Management showed Tuesday.

Highlights of ISM Manufacturing (April)

  • Factory index fell to 57.3 (est. 58.5) from 59.3; readings above 50 indicate expansion
  • Measure of production declined to 57.2 from 61; lowest level since November 2016 and biggest drop in a year
  • Prices-paid gauge rose for fifth consecutive month to 79.3, the highest since April 2011, from 78.1
  • Employment gauge dropped for a second month, to 54.2 from 57.3; matches lowest since May 2017

Key Takeaways

The results included signs that factories are having trouble keeping up with demand. A measure of order backlogs was the highest in almost 14 years, and delivery times lengthened to match the second-longest since March 2010. The gauges for new orders and production weakened for a fourth straight month.

Even with the April decline, the main index is close to the 57.9 average since January 2017 and is consistent with solid-but-moderating activity. Trump administration policies have created both tailwinds and headwinds for manufacturers: Tax cuts are expected to underpin demand, while materials costs are accelerating, partly from supply-chain disruptions stemming from tariffs on imported steel and aluminum. Energy costs are also on the rise, with oil reaching a three-year high last month.

Several ISM survey respondents cited concerns over tariffs and a potential trade war with China, adding to headaches for companies already struggling to find the workers, supplies and delivery trucks to keep up with robust demand, according to the ISM report. One company said that its business planning is at a “standstill.”

Economists taking note of the softer ISM factory payrolls index may nonetheless wait for its services counterpart before tweaking forecasts for April employment. The group’s non- manufacturing survey data are due Thursday, a day before the Labor Department’s jobs report.

The ISM numbers backed up a narrative running through recent earnings calls: many U.S. companies are noting rising input costs -- and an especially tough shipping environment -- even as pricing power has proved limited.

General Mills Inc., maker of Cheerios, cut its full-year earnings guidance in March as freight and commodity expenses squeezed profit margins. Higher ingredient costs are hurting net margins in the ice cream industry, Dunkin’ Brands Group Inc.’s leadership reported last week. And Post-it note maker 3M Co. recently reported a poor start to the year, as rising costs and weak demand for automotive and dental products prompted cuts to sales and profit forecasts.

Tariff-related uncertainties may last another one or two months and will probably “work itself out,” said Timothy Fiore, chairman of the factory survey for the Tempe, Arizona-based ISM. “Overall demand remains very strong,” and manufacturers are “having trouble catching up,” he said.

Economist’s View

“There is little evidence in the report that demand has cooled,” Stephen Stanley, chief economist at Amherst Pierpont Securities, wrote in a note. “Rather, difficulties in the sector are mainly on the supply side.”

Other Details

  • ISM gauge of new orders cooled to 61.2, lowest since July, from 61.9
  • Index of backlogs rose to 62; supplier delivery gauge advanced to 61.1, matching the second-highest level since 2010
  • Measure of customer inventories rebounded to 44.3 from 42
  • Export orders measure fell for second month to 57.7, lowest in 2018, from 58.7

©2018 Bloomberg L.P.

Bloomberg
Follow The Latest On The Global Economy On BloombergQuint