ISM reports March manufacturing growth after 16 months of contraction

A 16-month stretch of manufacturing contraction, going back to October 2022, came to a welcomed end in March, according to the new edition of the Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).

The report’s benchmark metric, the PMI came in at 50.3 (a reading of 50 or higher indicates growth), topping March’s 47.8, and contracting after 16 months of declines. ISM added that the overall economy grew, at a faster rate, in March, for the 47th consecutive month. The previous 16 months of contraction through February were preceded by a stretch of 28 consecutive months of growth.

The March PMI represents the highest reading over the last 12 months and is 2.8% above the 12-month average of 47.5, with June 2023’s marking the lowest reading over that period, at 46.4.

ISM reported that nine manufacturing sectors saw growth in March, including: Textile Mills; Nonmetallic Mineral Products; Paper Products; Petroleum & Coal Products; Primary Metals; Food, Beverage & Tobacco Products; Fabricated Metal Products; Chemical Products; and Transportation Equipment. Sectors posting declines included:  Furniture & Related Products; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Machinery; Computer & Electronic Products; and Miscellaneous Manufacturing.

The report’s key metrics mostly saw increased, including:

• New Orders, which are considered the engine that drives manufacturing, increased 2.5%, to 50.3, growing in March after contracting in February, which saw growth in January for the second time in the previous 21 months, at that point, with 12 orders reporting growth;
• Production, at 54.6, increased 6.2%, following contraction in February, after growing in January for the fourth time in the last 15 months, at that point, with 13 sectors reporting growth;
• Employment, at 47.4, was up 1.5%, contracting, at slower rate, for the sixth consecutive month, with seven sectors reporting growth
• Supplier Deliveries, at 49.9 (a reading above 50 indicates contraction), were faster in March after slowing in February, after growing, at a faster rate, for the 16th consecutive month through January, with four sectors reporting slower deliveries;
• Backlog of Orders, at 46.3, were flat in March, contracting for the 18th consecutive month, with three sectors reporting growth;
• Prices, at 55.8, increased 3.3%, increasing, at a faster rate, for the third consecutive month;
• Inventories, at 48.2, were up 2.9%, contracting, at a slower rate, for the 14th consecutive month, with nine sectors reporting higher inventories; and
• Customer Inventories, at 44.0, fell 1.8%, falling “too low,” at a faster rate, for the fourth consecutive month, with two sectors reporting customer inventories as too high   

Comments submitted by the ISM member panelists again highlighted various themes related to the economy and market conditions.

A Chemical Products panelist explained that performance continues to defy projections of a downturn in activity, adding that demand remains strong and the pipeline for orders robust.

And a Computer & Electronic Products panelist said demand remains soft and optimism remains high that orders are “just on the horizon, noting that expectations are positive for a strong second quarter, with minimal supply chain issues and only semiconductors and select electronic parts being an issue.

Tim Fiore, Chair of the ISM's Manufacturing Business Survey Committee, said in an interview that manufacturing output was in a trough over the August and September through December 2023 period, with 2024 forecasts looking very bullish at that time, especially for the second half.

“By the time we hit January, there was clear signs that were starting to come out of the trough,” he said. “February was a little bit less clear, but clear nonetheless. And now this is pretty much confirmed that we're climbing out of the trough. And we're not climbing out strongly, but we don't see any reason why we would plan out strongly. This is going to be a moderate growth cycle, and there's no reason why it should be any more than a moderate growth cycle.”

A potential obstacle to growth cited by Fiore would be interest rates going up, with the March Prices reading representing the only negative number in the report—something he said would not be an issue in more normal times.

“It wouldn't concern you that we had a 56 on prices but with the Fed is wanting to get down to the 2% rate in the next couple of years, this does not support that,” he said. “As long as they don't increase, we're fine. Higher for longer is OK. We don't have a problem with that; we were we were prepared to go all through this year with higher rates anyway, because our forecast was done before the Fed announced that we've capped out on rates and then we'll probably see three cuts. If Chairman Powell delays the first cut beyond June, it's not going to impact manufacturing. In June, if he ups the interest rate by half a point. You might see something happen here, but I don't see him doing that. I just see him holding the current rates higher for longer.”

Addressing March manufacturing demand, he said March’s New Orders number was good, despite headwinds on seasonality. He also explained that is supported by continued New Export Orders growth (flat at 51.6, growing, at the same rate, for the second consecutive month), with ISM panelists comments supporting more strength coming from Europe and China.

“I don't expect the New Export Orders to go into a decline,” he said. “That's probably going to be a clear tailwind for the New Order level for the next three-to-six months is really good. Customer inventories is in the too low of too low, at 44, so we're getting awfully close to 40, which is way too low. I think we need to see New Order levels get above 55 to see that backlog, start to get closer to 50. The increased rates of New Orders were satisfied by improved production. Production, at 54.6 was a bit of a surprise for me, and a couple of points more than I would have expected.

Looking at labor, Fiore observed that the manufacturing sector has remained at a 1:5 hire-to-fire ratio over the past four-to-five months, with layoffs used in March 75% of the time, and attrition and freezes at 25%. Which Fiore said was the highest ratio of layoffs since he began tracking this data, and expected to end soon.

On the inputs side with Supplier Deliveries hovering around the 50 mark, Fiore said that represents equilibrium, with as much pressure on delivering faster as suppliers are moving slower.

“I think that's going to get closer to 55 in the next couple of months,” he said. “And as far as manufacturing inventory is concerned, we're now in the normal range of 48-to-52. I expect it will stay there. So, there's not a ton of upside on inventory. The upside to support the PMI numbers is really Supplier Deliveries, climbing Employment getting back to expansion, and the New Order Number getting closer to 55. All in all, I think we're in great position here.”