Signs of Weakness in US Manufacturing... Aftermath of Interest Rate Hikes

Signs of aftershocks from the Federal Reserve's (Fed) aggressive interest rate hikes are gradually emerging in the U.S. manufacturing sector. This is due to soaring interest rates, a strong dollar, and a slowdown in exports.

According to the Wall Street Journal (WSJ) on the 6th (local time), ISM manufacturing new orders have contracted for six consecutive months through February this year. Based on the Fed's three-month moving average data, manufacturing production peaked in May 2022 after the pandemic but has since declined by 1.7%. The Commerce Department also reported that private capital goods orders (excluding aircraft) in January fell 3.5% compared to the peak in November 2021.

Jonathan Millar, Chief Economist at Barclays PLC, stated, "This suggests that consumers and businesses have begun to contract in the face of economic uncertainty." This manufacturing contraction can be interpreted as a precursor to a U.S. economic recession. Although manufacturing accounts for only about 11% of the U.S. Gross Domestic Product (GDP), it has traditionally been viewed as an early indicator of economic downturns.

WSJ pointed out that the Fed's aggressive rate hikes to curb inflation have increased not only consumers' costs for purchasing home appliances but also rental costs for high-priced items such as business machinery and equipment. With soaring inflation combined with high interest rates, more consumers are postponing purchases of expensive manufactured goods.

The Fed has raised U.S. interest rates to 4.5?4.75%, the highest since 2007, through a tightening cycle that began in March last year and has signaled further increases. Fed Governor Christopher Waller emphasized last week, "We cannot risk a resurgence of inflation," reinforcing the tightening stance. Jerome Powell, Fed Chair, is scheduled to testify before Congress on the 7th and 8th.

Millar warned, "If the Fed continues to raise rates, manufacturing will take a direct hit," adding, "It is hard to see that the sector will avoid a more severe recession than before."

Some manufacturing sectors are already feeling the impact. According to Fed data, production of home appliances, furniture, and carpets in January shrank by about 15% compared to the same month last year. WSJ noted that this aligns with the trend of existing home sales declining for 12 consecutive months. Production of steel, iron, and other primary metals also fell by 3.6% year-over-year. Machinery production decreased by 1.8%. During this period, production of plastics, food, beverages, tobacco products, computers, and electronics also declined.

The recent strong dollar trend is further raising the prices of U.S. export goods, heightening concerns about manufacturing slowdown. ISM new export orders have contracted for seven consecutive months. U.S. goods exports decreased for four consecutive months at the end of last year.

Currently, many economists expect the economy to cool this year due to the Fed's aggressive tightening. However, WSJ added that it is unclear whether the loss of momentum in manufacturing will lead to a broad recession. Ryan Sweet, an economist at Oxford Economics, said, "This suggests we will see some weakness around mid-year."

This content was produced with the assistance of AI translation services.