The ISM Manufacturing Index contracted for the fifth consecutive month
The ISM Manufacturing Index fell to 46.3 in March, weaker than consensus expectations for 47.5. Today’s reading puts the sector in contractionary territory for the fifth consecutive month. A figure above 50 is consistent with an expansion in activity, while a reading below 50 indicates contraction. With the exception of the period corresponding with the collapse in economic activity during the pandemic-related lockdowns, the result was the worst monthly reading since 2009.
Manufacturing activity has been on a steady grind down since peaking exactly two years ago, when consumers were quarantined and went on a spending spree for goods. A confirmed decline in manufacturing activity comes on the back of a more benign consumer spending report last week. Softening demand for goods has paved the way for manufacturers to trim payrolls and lighten up their production schedules — the combined effect of which is clear as the manufacturing malaise spreads.
The report illustrated that the relative weakness in activity has become increasingly broad-based. A decline in new orders — a key forward-looking indicator for future activity — led the way lower, but its impact is also spilling over into falling production, slimmer inventories, and a reduced backlog of work.
Although nearly 70% of respondents reported no change in their workforce, more manufacturers are trimming their payrolls at the margins. A continued slowdown in demand and production in the coming months is likely to accelerate that trend.
If there was any positive news to be found, it came in the index’s key inflation-related gauge, which indicated that aggregate prices for raw materials declined in March. For those looking for any indication that multigenerational high inflation is continuing to retreat, weaker material costs are welcome. Raw material prices alone don’t tell the whole story though.
The ISM Services Index, the ISM Manufacturing Index’s counterpart, remains in expansionary territory following its recent spike to start 2023. This divergence illustrates the change in consumer behavior that’s evolved over the better part of the past year — shifting from durable goods such as refrigerators, furniture, and cars to services such as vacations, concerts, and restaurant dining. The same story is unfolding in the inflation data, as the Federal Reserve has repeatedly cited core services (excluding housing) as the most important area of inflation to monitor.
The bottom line? Manufacturers remain under pressure, recently exacerbated by the economic ripple effects following recent stress in the banking sector and continued interest rate hikes from the Fed. Economic momentum in the goods-producing sectors of the economy continue to slip and appear likely to remain under pressure in the near term. Reduced demand should help to rein in prices — a development that should over time help to bring consumer prices back into a more comfortable range.
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