An employee fits a headlight unit to a Ford Fiesta automobile on the assembly line at the Ford Motor Co. factory. (Photographer: Krisztian Bocsi/Bloomberg)

U.S. Factory Gauge Falls to Two-Year Low

(Bloomberg) -- A gauge of U.S. factories fell in April to the weakest level since late 2016, signaling that manufacturing headwinds extended into the second quarter as companies continue to confront uncertainty about trade.

The Institute for Supply Management index slumped to 52.8 from 55.3 the prior month, missing all estimates in Bloomberg’s survey while holding above the 50 level that signals expansion. Three of five components declined, including new orders, employment and production, according to the report Wednesday. Thirteen of 18 industries saw growth.

The data add to reasons for Federal Reserve policy makers to leave monetary policy unchanged at the conclusion of their meeting Wednesday in Washington. Treasury yields fell after the report to trade near a three-week low. A separate report Wednesday from the Census Bureau showed construction spending fell in March for the first time in four months.

U.S. Factory Gauge Falls to Two-Year Low

“We have moved from an unsustainable high level in manufacturing last year,” said Russell Price, chief economist at Ameriprise Financial Inc. “This year, the pace of growth will be slower, but still solidly positive.”

Key Insights

  • The unexpected decline to the lowest level of President Donald Trump’s tenure adds to signs that uncertainty about global trade and growth is dimming the outlook for producers across the world’s largest economy even as other measures of economic health have been looking more upbeat.
  • The gauge for export orders fell below 50 for the first time in three years while imports missed the threshold for the first time in two years, the latest evidence Trump’s trade wars are weighing on factories.
  • ISM’s employment gauge fell to near a two-year low, signaling weakness ahead of Friday’s U.S. jobs report. Still, economists expect it to show April factory hiring rose after the first drop in more than a year and a half. Separate data released Wednesday from the ADP Research Institute showed U.S. companies added the most workers since July last month. 
  • The measure for new orders also slipped to near the weakest since 2016, indicating softer demand. At the same time, the inventories gauge increased, suggesting stockpiles continue to expand, a trend that will likely eventually reverse and be a drag on growth.

What Bloomberg’s Economists Say

“While still in territory consistent with expanding activity, broad-based declines in the headline, new orders, new export orders and production suggest that factory-sector activity is cooling considerably. This is partly a producer response to the inventory overhang that has continued to build over the past three quarters.”
-- Yelena Shulyatyeva and Carl Riccadonna, economists
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U.S. Factory Gauge Falls to Two-Year Low

Official’s View

“Continued trade issues are providing headwinds to the manufacturing economy,” Timothy Fiore, chair of ISM’s manufacturing survey committee, told reporters on a call Wednesday.

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  • An index of prices paid dropped to 50, a signal that inflation pressures are likely to remain muted.
  • A gauge of supplier deliveries edged up to 54.6. Readings below 50 indicate faster deliveries, while those above 50 signal slowing. The customer inventories index was little changed while the order backlogs gauge increased.
  • The main ISM manufacturing gauge has held above the 50 line that divides expansion and contraction since August 2016.

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