US manufacturing sector regresses in April; prices paid near two-year high

WASHINGTON(Reuters) - U.S. manufacturing contracted in April amid a decline in orders after briefly expanding in the prior month, while a measure of prices paid by factories for inputs approached a two-year high.

The Institute for Supply Management (ISM) said on Wednesday that its manufacturing PMI dropped to 49.2 last month from 50.3 in March, which was the highest and first reading above 50 since September 2022. A PMI reading above 50 indicates growth in the manufacturing sector, which accounts for 10.4% of the economy.

Economists polled by Reuters had forecast the PMI little changed at 50. Manufacturing is being constrained by higher borrowing costs and spending shifting back to services and away from goods. Spending on goods fell in the first quarter.

The ISM survey's forward-looking new orders sub-index decreased to 49.1 from 51.4 in March. Output at factories slowed, with the production sub-index slipping to 51.3 after jumping to 54.6 in the prior month.

Despite weakening demand, inflation at the factory gate continued to heat up, suggesting that goods price disinflation could be close to running its course. Falling goods prices were the major driver of the moderation in inflation last year.

The survey's measure of prices paid by manufacturers shot up to 60.9, the highest reading since June 2022, from 55.8 in March. With price pressures picking up in the first quarter, the surge in input costs is unlikely to be welcomed by Federal Reserve officials as they wrap up their two-day policy meeting.

Policy makers are on Wednesday expected to leave the U.S. central bank's benchmark overnight interest rate unchanged in the current 5.25%-5.50% range, where it has been since July.

They have raised the policy rate by 525 basis points since March 2022. Financial markets have pushed back expectations of a rate cut this year to September from June.

A handful of economists continue to expect that borrowing costs may be lowered in July in the belief that the labor market will slow noticeably in the coming months. Others see the window closing for the Fed to start its easing cycle.

Input prices are rising even as delivery performance of suppliers to manufacturers has improved significantly, though the ISM noted in March that "some suppliers are struggling to keep up." The survey's measure of supplier deliveries fell to 48.9 from 49.9 in March.

A reading below 50 indicates faster deliveries.

Factory employment continued to contract, but the pace is slowing. The survey's measure of manufacturing employment increased to 48.6 from 47.4 in March. This measure has, however, not been useful in predicting manufacturing payrolls in the government's closely watched employment report.

Manufacturing employment has been little changed this year.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)