The manufacturing downturn continued in April

The manufacturing sector contracted again in April, marking the sixth consecutive monthly decline in activity. The Institute for Supply Management’s manufacturing index improved fractionally to 47.1 last month. Despite the unexpected uptick, the result still highlights the challenges for the manufacturing sector, which has been under increasing pressure since last year.

New orders declined again in April, reflecting soft demand for many goods. Compounding the reduction in customer demand, pockets of excess inventory are exacerbating the slowdown for some producers.

The persistent decline in new orders is a particularly ominous sign for the economy — a relatively strong historical indicator of a recession in the near term. As with so many other aspects of the current cycle, consumer spending patterns since 2020 have been unusual since the expansion began. An early buying binge of goods gradually faded as COVID-19 health risks subsided and a growing number of Americans gradually returned to travel and other activities that tipped household spending firmly in the direction of services and away from goods. 

Against that backdrop, a pronounced decline in manufacturing and goods consumption wasn’t surprising, but consumers are the critical growth engine for the U.S. economy. The key to extending the current expansion for now lies within the service sector while manufacturing gradually stabilizes.

The April report hinted at some degree of stabilization, not only with the headline index ticking higher, but notably in the jobs component of the survey. The employment index increased sharply to 50.2 from 46.9 in March. That’s far from a strong reading but could be a sign that employers are at least pausing to reassess their payroll levels in light of current conditions and the broad trimming of their workforce thus far. That stands in contrast to other measures of labor market conditions though; rising jobless claims, fewer job openings, and a continued slowdown in the pace of net job creation all point to a more broad-based deterioration in labor conditions. The economy appears to be increasingly feeling the effect of Fed rate hikes, and tighter bank credit conditions in recent months will likely compound the effect of higher interest rates in the coming months. Against that backdrop, the unexpected improvement in the ISM employment index appears more likely to be the anomaly, with the potential for further layoffs in manufacturing to come.

Although not apparent in the ISM data, stronger goods spending helped to lift personal consumption expenditures by 3.7% per the Commerce Department’s first estimate of Q1 GDP released last week — a surge that ended four consecutive quarters of contraction in goods consumption in 2022.

On a more concerning note, prices paid bounced back unexpectedly (53.2 in April versus 49.2 in March). Prices for a range of raw materials had been easing as the combination of fewer supply chain kinks, improved material availability, and slowing demand had alleviated the conditions that sent prices soaring in recent years. It’s a mixed bag across the sector, with the direction of prices varying by industry.

The bottom line? Manufacturing is still under pressure, as consumer demand for goods remains weak. Despite some signs that the pace of deterioration may be slowing, one month doesn’t make a trend. A more pronounced and prolonged improvement in the data would be needed to conclude that the goods economy is turning the corner. For now, weakness in the sector continues to point to heightened risk of recession in the near term.