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U.S. factories face toughest time since start of pandemic in 2020, ISM shows

The numbers: A key barometer of American factory activity fell to a 30-month low of 49% in November — contracting for the first time since the start of the pandemic — in another sign the U.S. economy is getting weaker.

The Institute for Supply Management’s manufacturing survey declined from 50.2% in October.

The ISM report is viewed as a window into the health of the economy. Numbers below 50% signal the economy is contracting.

The last time the index was this low was in May 2020, near the end of a nationwide lockdown in the early stages of the pandemic.

“Looking into December and the first quarter of 2023, business is softening as uncertain economic conditions lie ahead,” an executive at a maker of plastics and rubber products told ISM.

There’s a silver lining. Falling demand is unclogging supply-chain bottlenecks and the runup in material costs. That’s helping to ease inflation.

Economists polled by The Wall Street Journal had forecast the index to drop to 49.8%.

Key details:

  • The index of new orders dropped 2 points to 47.2%. Orders have been in negative territory in five of the last six months. ““General economic uncertainty has created a slowdown in orders as we approach the end of the year,” an executive at a machinery manufacturer told ISM.

  • The production barometer slipped to 51.5% from 52.3%.

  • The employment gauge fell 1.6 points to 48.4%, and some companies said they were resorting hiring freezes and even layoffs.

  • The prices index, a measure of inflation, declined again to 43% from 46.6%. That’s also the lowest level since May 2020.

Big picture: Manufacturers are bearing the brunt of the slowdown in the U.S. economy brought about by higher interest rates. The Fed is raising rates to try to tame the worst inflation in 40 years.

Consumers have also shifted spending from manufactured goods to services such as travel and recreation. That’s also reducing demand.

What’s more, exports are declining as the economies of other countries weaken and a strong dollar makes U.S. goods more expensive.

A potential slump in manufacturing could foreshadow a pending recession, economists say.

Looking ahead: “Manufacturing clearly is struggling in the wake of significantly higher borrowing costs,” said chief economist Ian Shepherdson of Pantheon Macroeconomics.

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.45%

and S&P 500
SPX,
-0.46%

were little changed in Thursday trades. Stocks have been rallying for the past month.

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