An improving trade balance is countering a worsening trend in a top manufacturing activity survey and may mean the Federal Reserve will raise rates longer than expected, according to economists. While the widely followed Institute for Supply Management survey has been falling steadily for the past several months, a decrease in imports could mean domestic producers will have to take up the slack, according to Andrew Tilton, U.S. economist at Goldman Sachs.
The ISM survey fell to 51.4% in May, the lowest since June of 2003. This would ordinarily mean the Federal Reserve is close to ending its rate hike, since a generally accepted rule of thumb is the Fed stops raising rates once when the ISM falls below 50%.
But with April's trade deficit coming in at $3 billion less than the average of the first quarter on an inflation-adjusted basis, manufacturers could get a shot in the arm from fewer imports, Tilton said. Further reductions in the deficit would bolster this sector, the economist noted. He cautioned the manufacturing sector was just one consideration in the Fed's rate decisions.
