Here’s How the Fed’s High Interest Rates Have Affected Manufacturing

The Federal Reserve’s high interest rates are damping demand for manufacturing products, according to two data reports released Monday.

The manufacturing sector showed continued weakness in June, with tepid demand, limited output, and decreasing confidence among factory and fabrication executives. However, the surveys also indicated manufacturing costs were cooling, providing more data to show that inflation pressures may be easing. 

The Institute for Supply Management (ISM) reported a manufacturing Purchasing Managers’ Index (PMI)  of 48.5% in June, below May’s results. It was nearly a full percentage point lower than the increase economists surveyed by The Wall Street Journal and Dow Jones Newswire expected.

It’s the third straight month of declines for the closely followed index, which has moved lower in 19 of the past 20 months. However, the readings still indicate the broader economy is expanding. 

How Does the Fed’s Monetary Policy Affect Manufacturing?

New order levels in the ISM’s PMI report for June still indicated a pullback from customers, while lower exports and backlog orders also demonstrated weakening demand.  High interest rates continue to be a problem for the manufacturing sector, said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee in a statement.

“Demand remains subdued, as companies demonstrate an unwillingness to invest in capital and inventory due to current monetary policy and other conditions,” Fiore said. 

The Federal Reserve has held its influential fed funds rate at a 23-year high for nearly 12 months, pushing up the cost of borrowing for businesses and consumers. The interest rates are designed to tame inflation by slowing spending throughout the economy, including in the manufacturing sector.

“The Fed wants the economy to keep running in low gear near-term,” wrote Comerica Chief Economist Bill Adams. “They will see ongoing softness in manufacturing as contributing to their goal of less inflation.”

Second Report Shows Low Manufacturing Leader Confidence

A separate report from S&P Global Market Intelligence, released Monday, showed the slowdown may continue, as manufacturing business leaders’ confidence touched a 19-month low.

“Factories have been hit over the past two years by demand switching post-pandemic from goods to services, while at the same time household and business spending power has been diminished by higher prices and concerns over higher-for-longer interest rates,” said Chris Williamson, S&P Global Market Intelligence chief business economist.

Another facet of high interest rates may in fact be a silver lining for manufacturers, however. The ISM survey showed the index measuring prices manufacturers paid for materials declined nearly 5 percentage points to 52.1% for last month.

“Price pressures have not gone away, but they have abated,” wrote Wells Fargo Economists Tim Quinlan and Shannon Seery Grein.