Key Takeaways
The Federal Reserve's influential federal funds rate is currently at its highest in 23 years. Rising interest rates have weakened demand from manufacturers and pushed up the cost of raw materials. Demand for manufactured goods continued to weaken in June, although price pressures appear to be easing.
Two data reports released Monday showed that the Federal Reserve's high interest rates are suppressing demand for manufacturers' products.
Manufacturing remained weak in June with weak demand, limited production and declining confidence among factory and processing company executives, but surveys also showed production costs were falling, providing further evidence that inflationary pressures are easing.
The Institute for Supply Management said its manufacturing Purchasing Managers' Index (PMI) rose 48.5% in June, down from May and nearly a percentage point below the increase expected by economists surveyed by The Wall Street Journal and Dow Jones Newswires.
The closely watched index has fallen in 19 of the past 20 months and is now down for three straight months, but it still shows the overall economy is expanding.
How will the Fed's monetary policy affect manufacturing?
“The ISM's June PMI report for new orders still points to tightening customer demand, while declining exports and backlogs also point to weakening demand. High interest rates continue to be a problem for manufacturers,” Timothy Fiore, chairman of the ISM Manufacturing Economic Survey Committee, said in a statement.
“Demand is weak as current monetary policy and other conditions make companies reluctant to invest in capital and inventory,” Fiore said.
The Federal Reserve has kept its influential federal funds rate at a 23-year high for nearly 12 months, raising borrowing costs for businesses and consumers. The rate is intended to curb inflation by slowing spending across the economy, including in manufacturing.
“The Fed would like to see the economy continue to operate at a slower pace in the near term,” Comerica chief economist Bill Adams wrote. “The Fed sees continued weakness in manufacturing as helping it achieve its goal of containing inflation.”
Second report shows low confidence among manufacturing leaders
A separate report from S&P Global Market Intelligence on Monday showed manufacturing executive confidence hit a 19-month low, suggesting the economic slowdown could continue.
“Over the past two years, factories have been hit hard by a post-pandemic shift in demand from goods to services, while at the same time rising prices and fears of higher interest rates for longer have eroded purchasing power for households and businesses,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
But another aspect of high interest rates may actually be a silver lining for manufacturers: An index measuring the prices manufacturers pay for materials fell nearly 5 percentage points last month to 52.1%, according to the ISM survey.
“Price pressures have not disappeared, but they have abated,” Wells Fargo economists Tim Quinlan and Shannon Seely Grein wrote.