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U.S. manufacturing sector sinks further in January - ISM

A worker operates one of the metal cutting machines at Gent Machine Co.'s factory in Cleveland

WASHINGTON(Reuters) - U.S. manufacturing contracted further in January as higher interest rates stifled demand for goods, but factories did not appear to be laying off workers in large numbers.

The Institute for Supply Management (ISM) said on Wednesday that its manufacturing PMI dropped to 47.4 last month from 48.4 in December. The third straight monthly contraction pushed the index to the lowest level since May 2020 and below the 48.7 mark viewed as consistent with a recession in the broader economy.

Economists polled by Reuters had forecast the index falling to 48.0. A PMI reading below 50 indicates contraction in manufacturing, which accounts for 11.3% of the U.S. economy.

The Federal Reserve's fastest interest rate-hiking cycle since the 1980s as it fights inflation is undercutting demand for goods, which are mostly bought on credit. The dollar's past appreciation against the currencies of the United States' main trade partners and a softening in global demand are also hurting manufacturing. Spending is shifting back to services.

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The weakness in the ISM mirrored a deterioration in the so-called hard manufacturing data. Manufacturing production declined at a 2.5% annualized rate in the fourth quarter, data from the Fed showed last month.

The ISM survey's forward-looking new orders sub-index plunged to 42.5 in January from 45.1 in December. It was the fifth straight month that this measure has contracted. Weakening demand and improved raw material supplies have reduced the backlog of unfinished work at factories.

The survey's measure of supplier deliveries edged up to 45.6 from 45.1 in December. A reading below 50 indicates faster deliveries to factories. Stretched supply chains early in the COVID-19 pandemic as millions of Americans worked from home was one of the major drivers of inflation last year.

The combination of better supply and ebbing demand has resulted in a significant slowdown in consumer and wholesale inflation, with outright declines in monthly goods prices.

The ISM survey's measure of prices paid by manufacturers rose to 44.5 from 39.4 in December.

Despite demand being under pressure, factories are holding on to their workers, for now. The ISM survey's measure of factory employment dipped to 50.6 from 50.8 in December. But this gauge, which has swung up and down, has not been a good predictor of manufacturing payrolls in the government's closely watched employment report.

According to a Reuters survey of economists, manufacturing employment likely increased by 6,000 jobs in January after rising 8,000 in December. Overall, nonfarm payrolls are forecast to have increased by 185,000 jobs last month. The economy added 223,000 jobs in December.

January's employment report is due on Friday.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)