in October 2022

• The ISM Manufacturing PMI report fell slightly to 50.2 in October 2022
• The Commodity Prices component index fell into contractionary territory for the first time since June 2020
• Inventory conditions among manufacturers as well as their customers improved in October 2022, and Order Backlogs have eased
• Export Orders for Manufacturers continued to deteriorate in October 2022, indicating worsening global economic conditions

The ISM Manufacturing PMI report came in at 50.2 for October 2022. This is down modestly from September’s 50.9 and represents a fifth consecutive month of flat or declining results for this report. This diffusion index measures net activity among manufacturers, with a reading of 50 indicating an even split between those indicating expansionary and contractionary conditions. The ISM Manufacturing report has not yet posted a contractionary result in its topline index since recovery from early-pandemic chaos took hold (43.1 in May 2020; 52.2 in June 2020). But current retrenchment in the overall index provides insight into the industry’s efforts to normalize after enduring supply chain disruptions and evolving consumer demand preferences over the past year. Manufacturers’ operations appear to be stabilizing just as the U.S. economy is facing a broader slowdown.

Commodity Prices fell for the first time since the pandemic’s impacts took hold, posting a result of 46.6 for October 2022. This is the first Commodity Prices report that has fallen below the expansionary threshold of 50 since June 2020. The Commodity Prices component of the ISM Manufacturing report had sustained levels above 75 from January 2021 through June 2022 before decelerating sharply over the past few months and now having posted an outright net decline for October. Oil price have stabilized over the past two months, relieving one source of new cost pressure on manufacturers and allowing oil price spikes from earlier in the year to work their way through supply chain and retail pricing. The benefits of lower Commodity Prices for manufacturers should translate into less upward pressure on consumer prices through the fourth quarter of this year as the need to pass on upstream costs throughout the transportation, wholesale, and retail pipelines diminishes.

The Employment component index of the ISM Manufacturing PMI report climbed back to the expansionary threshold of 50.0 in October 2022. The Employment component fell into contractionary territory in September (48.7) and had reported sub-50 readings for four (4) of the prior five (5) months from May through September. New Orders for manufacturers have also been relatively weak according to the ISM Manufacturing PMI report, indicating a slowdown in demand for new hiring among manufacturers. The New Orders component of the index posted a result of 49.2 in October after a 47.1 result in September. The weak New Orders numbers reflect the combination of U.S. personal consumption expenditure preferences having shifted to services spending throughout the summer months of 2022, inflation’s overall impact on affordability of big-ticket items for many households, and a dramatic slowdown in homebuying since the start of this year. All of these trends remain intact as 2022 comes to a close, and so 2023 should continue to see tempered demand for new hiring among manufacturers.

PNC expects the Federal Reserve to increase the Fed Funds rate by another 75 basis points on Wednesday (11/2) in response to still-high consumer price inflation readings and unrelenting labor market gains. And while the past few monthly ISM Manufacturing reports have revealed some easing in upstream pricing pressures – without turning in dramatically contractionary results – the Fed is not likely to be swayed from their aggressive monetary policy tightening efforts until household budgets see real, sustained relief from inflation.