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Economic Report: ‘It seems everyone is bracing for a recession’: U.S. factories contract for third month in a row, ISM finds

The numbers: A key barometer of American factories contracted for the third month in a row to 47.4% and touched the lowest level since early in the pandemic, signaling a loss of momentum in the U.S. economy as it entered the new year.

The Institute for Supply Management’s manufacturing survey fell to 47.4% from 48.4% in prior month.

Economists polled by The Wall Street Journal had forecast the index to total 48%.

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

“We knew the first half [of 2023] was going to be a little bit of a struggle,” said Timothy Fiore, chairman of the survey.

The last time the index was that low was in May 2020 during the early stages of the pandemic.

Key details:

The index of new orders dropped 2.6 points to 42.5%. The index has never been that low except during previous recessions. “Thus far, the outlook for the first half of 2023 looks very soft,” an executive at a metal-parts manufacturer said. “It seems everyone is bracing for a recession.”

The production barometer fell 0.6 points to 48%.

The employment gauge slipped 0.2 points to 50.6%, but it was still positive. Companies are hesitant to fire workers given how hard it was to hire them in the first place amid the worst labor shortage in decades.

The prices index, a measure of inflation, rose to 44.5% from 39.4%, breaking a string of nine straight declines.

A shortage of goods tied to pandemic-related supply disruptions helped ignite the worst bout of inflation in 40 years. Some companies still face lingering cost pressures, but these supply bottlenecks continue to ease.

“There have been a lot fewer supply disruptions so far this year, and few expected in the short term,” a senior executive at a chemical company said. “The crystal ball remains a little blurry for the rest of 2023.”

Big picture: Manufacturers are among the first companies to show signs of stress when the economy slows. Customers tend to cut back on purchases of goods, especially big-ticket items, if they feel less confident in their financial well-being.

Adding to the stress on manufacturers, consumers have shifted more of their spending to services such as travel and recreation.

The outlook is unlikely to improve much anytime soon. The Federal Reserve is jacking up interest rates as part of the battle to tame inflation. Higher borrowing costs usually depress the economy.

Looking ahead: “The ISM report reinforces our view that the U.S. economy is heading for recession,” said senior U.S. economist Andrew Hunter at Capital Economics. “The silver lining is that weakening demand is continuing to exert downward pressure on inflation.”

Market reaction: The Dow Jones Industrial Average

and S&P 500

fell in Wednesday trades.

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