Report On Business® Roundup: March Manufacturing PMI®
In recent months, the Chair of the Institute for Supply Management® Manufacturing Business Survey Committee had expressed confidence that U.S. factory activity could return to expansion sometime in the spring.
The Manufacturing ISM® Report On Business® data for March crunched a composite PMI® that validated his optimism: 50.3 percent, the first reading in expansion territory since September 2022. However, Timothy R. Fiore, CPSM, C.P.M., felt compelled to, half-seriously, add at the end of a conference call with reporters on Monday: “This was not an April Fool’s Day joke. The numbers are real.”
After the data was released, the U.S. dollar index rose, Treasury yields continued a sharp climb, and analysts and investors hedged bets on the likelihood of the U.S. Federal Reserve (Fed) cutting interest rates in June. Anxiety regarding potential Fed policy was largely a product of a Prices Index that reached its highest level in 20 months, at 55.8 percent.
While commodities inflation remains a concern, the overall health of the manufacturing sector indicates “a growth cycle,” Fiore said. “And it starts with the fundamentals. Many of the industries performed well — not exceptionally well, but the biggest industries in particular gained performance compared to February. And activity levels were up (in the indexes) where they needed to be, with new orders and production expanding, a nice step up in inventory levels and employment reductions slowing.”
The Production Index gave the PMI® its biggest boost in March, up 6.2 percentage points to 54.6 percent. That index showed resiliency during the 16-month contraction period, staying higher than what might be expected thanks to the backlogs worked off due to coronavirus pandemic-inspired overordering. With backlogs contracting, production levels are more about business activity.
As a result, the New Orders Index expanded for just the third time in 22 months, registering 51.4 percent. Where the New Orders and Production indexes go, the Employment Index (47.4 percent, up 1.5 percentage points) should follow, but the March reading suggests companies are still right-sizing staffs.
The ISM production index rose to 54.6, the highest level since June 2022 while the employment sub-index stood at just 47.4. Taken at face value, this implies a pretty solid pick-up in manufacturing sector productivity growth in the coming quarters. pic.twitter.com/LlSXrhVW71
— RenMac: Renaissance Macro Research (@RenMacLLC) April 1, 2024
The Inventories Index (48.2 percent) also ticked up, and panelist sentiment again indicated that companies are eager to invest in boosting stock levels. Fiore suggested it’s possible all five subindexes (New Orders, Production, Employment, Supplier Deliveries and Inventories) that directly factor into the PMI® could be in expansion territory soon. Given that manufacturing growth cycles average between 28 and 36 months, that’s not idle speculation.
“The signs point to a decent expansion cycle — not incredibly strong, but decent,” Fiore said. “Our panelists were very bullish about 2024 in December, predicting 5.6-percent revenue growth (in ISM’s Semiannual Economic Forecast), and that was before the Fed announced potential rate cuts. It’s a good trajectory, and if interest rates come down, that will only be an extra tailwind.”
Another sign of the shifting direction: In recent months, the Manufacturing ISM® Report On Business® tracked the share of sector gross domestic product (GDP) with a PMI® calculation under 45 percent. With that figure at 1 percent for a second straight month in March, Fiore said on ISM’s LinkedIn Live broadcast that the April report will begin tracking the GDP share with a PMI® above 55 percent.
Finally, the collapse of the Francis Scott Key Bridge in Baltimore has generated much speculation on the supply chain impact, but Fiore said he expects a minimal effect on the April PMI® numbers. “The detour for road freight is an hour or two extra, so I don’t see that as a significant issue,” he said. “Ocean freight issues will be greater over the next month but should resolve themselves when the (Port of Baltimore) reopens in the next week or two.”
ISM manufacturing makes Powell/Waller's "no rush to cut" line sound increasingly prudent
— Michael Brown (@MrMBrown) April 1, 2024
The Report On Business® roundup:
Barron’s: U.S. Manufacturing Grows for First Time Since September 2022. “The U.S. manufacturing industry, a key driver of America's economy, grew in March for the first time since September 2022. That’s a relief. … The stocks are down on good news, but manufacturing stocks don’t typically react all that much to the ISM PMI® number. Most of the time it tells investors something they already know.”
Bloomberg: U.S. Manufacturing Activity Expands for First Time Since 2022. “The nation’s purchasing and supply management executives have recently expressed optimism about the outlook for manufacturing. Firmer orders growth illustrates resilient consumer demand and business investment, and suggests companies have made strides getting inventory levels in line with sales. The ISM data showed factory stockpiles contracted at a slower rate last month than in February, while a measure of customer inventories shrank at a faster pace.”
CNBC: ISM Manufacturing Gauge Tops Expectations. “Here’s the reason rates are moving up a bit: The March read on ISM Manufacturing (was) 50.3 percent,” analyst Rick Santelli said. “It breaks a streak of 16 consecutive reads under 50. A 55.8 percent read on (the Prices Index) is moving in the wrong direction, though, and higher than expected. … That’s not really a good thing if you’re looking for prices to moderate and actually give credence to the fact we’re still pricing in an (interest rate) cut in June, despite the fact that we didn’t really get any backup in the inflation data.”
Mace News: ISM Manufacturing Indicates First Expansion in 17 Months on Recovering New Orders, Output, Slower Employment Contraction. “Fiore told reporters on Monday that new orders and production are unlikely to fall back into negative territory in coming months, and predicted that employment conditions should recover to expansion in May or June. Fiore does not expect seasonal adjustments to cause major distortion in the foreseeable future, saying, ‘We beat (any unfavorable effects of) seasonal adjustments in new orders in March.’ ”
It appears the index of "new orders minus inventories" still has predictive power.
— Gregory Daco (@GregDaco) April 1, 2024
The ISM #manufacturing index is likely to firm further into expansion territory this spring indicating a gradual turn-around in manufacturing output. pic.twitter.com/zqRCblyWiV
MarketWatch: Manufacturers Show Sign of Revival as ISM Index Turns Positive for First Time in 17 Months. “Manufacturers have been mired in a slump of sorts for almost a year and a half because of high inflation, rising prices and a shift in consumer spending patterns to favor services such as travel and recreation. Yet the prospects of a full-blown recovery are improving amid expectations the Federal Reserve will reduce borrowing costs later this year and boost demand.”
Reuters: U.S. Manufacturing Sector Grows For the First Time in 1½ Years. “Economists polled by Reuters had forecast the PMI® rising to 48.5 percent. Though consumer spending has shifted to services, demand for goods remains supported. … There was no sign of supply chain constraints from attacks on international shipping in the Red Sea by Yemen’s Houthi militants. The survey’s measure of supplier deliveries slipped to 49.9 percent from 50.1 percent in the prior month, with a reading below 50 indicating faster deliveries.”
ISM’s Services PMI® will be unveiled on Wednesday, and the Hospital PMI® on Friday. For the most up-to-date content on the reports under the ISM® Report On Business® umbrella, use #ISMPMI on X, formerly known as Twitter.
(Photo credit: Getty Images/Matveev Aleksandr)