Column-Hard-ish landing has already arrived for U.S. manufacturers: Kemp

By John Kemp

LONDON (Reuters) – U.S. manufacturers reported widespread declines in activity in March, as the sector struggled with excess inventories, persistent inflation, rising interest rates and heightened caution among businesses and consumers.

The manufacturing sector is already experiencing something very like a recession and faces a challenging outlook as the central bank maintains pressure on interest rates to counter inflation in the much larger service sector.

The Institute for Supply Managements purchasing managers index slipped to 46.3 (13th percentile for all months since 1980) in March, from 47.7 (17th percentile) in February and 57.1 (81st percentile) a year earlier.

The index has pointed to a fall in manufacturing activity for five months in a row, with readings below the 50-point threshold dividing expansion from a contraction since November 2022.

It has slipped to levels consistent with the onset of the last four recessions in 2020, 2008, 2001 and 1990, implying the manufacturing sector is experiencing a cyclical slump even if there is still momentum in services.

Chartbook: Manufacturing and distillate consumption

Activity looks set to decline even further in the next few months, with the new orders component slipping to 44.3 (6th percentile) in March from 47.0 (11th percentile) in February and 53.8 (38th percentile) a year ago.

Slackening activity has begun to filter through into weakening employment demand, until now largely immune, which will translate into job losses as labour hoarding ends.

The employment index slumped to 46.9 (19th percentile since 2000) in March from 49.1 (29th percentile) in February and 55.3 (79th percentile) a year earlier.

Diesel demand slips

The full impact of interest rate increases and declining real wages over the last year has yet to filter through to business investment and consumer spending.

But the manufacturing and freight downturn is already depressing domestic consumption of diesel and other distillate fuel oils, the most cyclically sensitive part of the petroleum market.

Consumption of diesel and other distillate fuel oils has been falling since the second quarter of 2022, in line with the slowdown in manufacturing and freight activity.

The volume of distillate fuel oil supplied to the domestic market was down -4.4% in the three months from November to January compared with the same period a year earlier.

Consumption is dropping at the fastest rate since recessions in 2020, 2008/09 and 2001, as well as manufacturing-centred mid-cycle slowdowns in 2012 and 2015.

The fall in consumption should gradually allow depleted inventories to recover as the year progresses and take some of the heat out of refining margins and diesel prices.