Source: Blog – Alliance for American Manufacturing

The Federal Reserve building in Washington, DC. | Getty Images

According to a leading purchasing managers index, it is. But the Fed is unlikely to ease off with the rate hikes.

We’ve been keeping an eye on purchasing managers indices, watched for each month to gauge activity in the manufacturing sector, as worries about inflation and responding rate hikes made by the Federal Reserve portended the sector would begin contracting. That continues to look like the case we’re in: One of the big ones, the Institute for Supply Management’s (ISM) manufacturing index, last week dropped below 50 for the first time since May 2020 – and any number below 50 signals a contraction. Inventory and production is up, but new orders, prices and the rate of hiring is down. This tracks with the manufacturing jobs number we got on Friday – only 14,000 were created last month. That’s a considerable dropoff from its recent rate of growth.

So now that manufacturing is slowing down, will the Fed let up with its rate hikes that are meant to cool off economic activity? Well, ISM’s services index (they got one for the service sector too) shows that enormous sector is still growing, and that hiring and wage growth in it are still up. So the Fed is unlikely to stop. Economists are optimistic that we might avoid an economy-wide recession in 2023, but the rate hikes, which have already helped make the manufacturing sector contract, are expected to continue. The “soft landing” rhetoric describing the central bank’s actions isn’t appropriate, pointed out a Washington Post columnist. “A more appropriate term is probably a ‘forced landing’ or an ‘emergency landing.’ Or, we should ditch the landing gear entirely and call this best-case scenario something more like a ‘stall session,’” writes Heather Long:

Fed leaders have been as clear as they can in warning that they are not done hiking rates and expect more fallout. “We have got to get inflation behind us,” Powell said in September. “I wish there were a painless way to do that. There isn’t.” Even the normally optimistic New York Fed President John Williams predicted unemployment could rise to 5 percent, up from the current 3.7 percent. That means about 2 million people would lose their jobs.

Pushing manufacturing activity to contract in order to get everybody to stop shopping, lay off a bunch of people, and cool the economy is … well it’s not great! A strong manufacturing sector is key to getting the national clean energy transition off the ground. The Europeans don’t like it, but making sure all of that stuff – from solar panels to heat pumps to electric vehicle batteries – is made in America was essential to getting that legislation passed.

It’s gonna take longer to make that transition happen if interest rates remain high and manufacturing activity is suppressed.

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