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US factory woes add to pressure on Fed to hold interest rates

US factories have suffered their worst month for three years, heaping further pressure on the Federal Reserve to hold off from raising interest rates when it meets next month.

A sharp decline in exports and plunging domestic orders were blamed for the fall in activity for February, making the month the lowest point for US manufacturing since the start of 2013 and joint lowest with October 2009.

A survey of European businesses also disappointed investors and indicated that recent turmoil in global markets has dealt the eurozone economy a bigger blow than previously estimated.

Fed chiefs meet in three weeks to consider how to react to the global slowdown and slump in oil prices that has hit exports and stalled the US recovery since it raised rates in December for the first time since the financial crisis. Meanwhile, the European Central Bank has already indicated it is likely to inject further funds into the eurozone when its governing council meets in a fortnight.

Fed chair Janet Yellen is expected to push for a delay in the next rise to 0.75% after she highlighted the difficulties faced by the global economy following a decline in Chinese manufacturing output and the knock-on effects for factories in the Asia region, Europe and the US.

But she could meet resistance from her deputy, Stanley Fischer, who is known to be more cautious about abandoning the previous expectation for four rate hikes this year.

John Williams, the head of the San Francisco Fed, told the Los Angeles Times that he saw no reason to delay after an increase in inflation over recent months.

“The basic approach we took, which is a gradual rate increase, is still right,” he said.

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US and European stock markets fell back on Monday as data appeared to show the worsening global situation spreading to the US, following a slight improvement in January.

A car factory production line

But the prospect of a delay to US interest rate rises kept stock values from losing all their gains from earlier in the day and pushed the Dow Jones in New York 236 points higher (at 18:30 GMT) to 16,623.

The Dax climbed almost 2% to 9570 while the FTSE 100 closed at 6041, up more than 1.5%.

Brent crude jumped by 5% to $34.7 (£24) a barrel, higher than the $27 a barrel it hit at the beginning of the year, but lower than the $36 a barrel seen earlier this month.

The Markit flash purchasing managers’ index (PMI) of US manufacturing businesses registered the third month of decline out of the past four.

Firms said they were largely unaffected by bad weather and instead blamed the high dollar for a steep fall in exports and uncertainty about the general economic outlook, which encouraged customers to delay spending decisions.

After a rise in the index to 52.4 in January, it fell back to 51.0. A figure greater than 50 indicates expansion.

Some analysts speculated that a collapse in orders for equipment from the US and Canadian oil industries, and especially fracking firms crippled by the low oil price, had hit US manufacturing harder than previously understood.

Bill Lee, chief US economist at Citi, said before the PMI figures appeared that his previously bullish expectations of a recovery in manufacturing had failed to spot a crisis for factories manufacturing kit for the fracking industry. He said the expected “oil dividend” – where consumers had been saving money on fuel – had been banked rather than spent, delaying an expected upturn in demand for US goods.

Chris Williamson, chief economist at financial data provider Markit, which conducted the manufacturing survey, said: “US factories are reporting the worst business conditions for over three years. Every indicator, from output, order books and exports to employment, inventories and prices, is flashing a warning light about the health of the manufacturing economy.”

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Companies, especially in the services sector, have continued hiring workers, but other indicators have shown the US economy stalling.

Williamson said manufacturers were likely to start laying off workers if the situation persisted.

“With backlogs of work slumping to the greatest extent since the height of the recession in 2009 and inventories rising for the third successive month, it’s likely that firms will come under increasing pressure to cut payroll numbers and production in coming months unless demand revives,” he said.

“The one caveat is that the survey was conducted in a month in which parts of the US suffered extreme weather. However, few survey respondents reported that the weather had a material impact on business over the month, instead often simply observing a general slowdown in trade and the economy.”

Source:https://www.theguardian.com

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