The manufacturing sector has been trending lower in the past few months, providing an indication that the “soft landing” Federal Reserve policymakers have been aiming for is taking hold.
Reports from the Purchasing Management Association of Chicago and National Association of Purchasing Management are on tap this week and should give financial market watchers more evidence that growth in the sector remains stagnant, although the data are likely to reflect energy price spikes during the month.
The Chicago purchasers will set the tone with their October report Tuesday, followed by the national report Wednesday.
Both the Chicago and national purchasers’ reports offer a snapshot of conditions in the manufacturing sector, but aren’t always completely in sync because of regional production differences.
A BridgeNews survey of forecasters put the national index at 49.5, near steady with 49.9 in September. Prices paid were pegged at 59.0, up slightly from September’s 58.1 but well below March’s peak of 79.8.
A reading above 50 is viewed as a sign of economic expansion, while one below 50 suggests contraction.
The overall trend in the manufacturing sector in recent months has been one of deceleration. Financial futures markets have started to price in an easing of interest rates by the Fed early next year because it appears the economy is slowing enough to warrant it.
Prices paid in October were expected to rise slightly because energy prices continued to spike upward amid mounting tensions in the Middle East. But some economists said soaring energy prices actually had done some of the work for the Fed to slow the economy by trimming consumer spending.
“Energy is a major factor that has slowed the U.S. economy, because oil prices have drained upward of $70 billion from retail spending,” said David Littman, senior economist at Banc of America Securities.
But he said the bigger factor curtailing spending and investment was a higher interest rate environment, which has created a harder landing in rate-sensitive areas, such as housing and heavy industry.
“The economy as a whole is decelerating, and these upcoming manufacturing reports provide more evidence,” Littman said. “Sometime early next year the Fed should be in loosening mode.”
