In what the pessimists among you might fairly characterize as a somewhat foreboding development, the pace of US manufacturing activity cooled more than expected in March, according to the most prominent survey.
Although the latest read on ISM’s factory gauge tipped a 22nd consecutive month of overall economic expansion, the headline print missed consensus and nearly matched the lowest estimate from 68 economists.
At 57.1, the index fell to the lowest since September of 2020 (figure below). For what it’s worth, the final read on S&P Global’s US factory gauge moved higher from the flash print, and now sits at its best levels in six months.
“The US manufacturing sector remains in a demand-driven, supply chain-constrained environment,” ISM Chair Timothy Fiore said, in a press release, on the way to describing “progress” on pervasive labor shortages which should “result in improved factory throughput and supplier deliveries.”
The inventories gauge moved higher, while production and new orders both dropped to the lowest since May of 2020. The decline in new orders was particularly large. The index fell to 53.8 from 61.7 in February.
The employment index was the highest in a year, customer inventories the highest since December 2020. “Suppliers are not waiting to experience the full impacts of price increases before negotiating with their customers,” Fiore remarked. The prices paid gauge rose to 87.1.
Overall, I’m the furthest thing from convinced that March’s ISM report should be read as encouraging. In fact, I’d be inclined to call it a canary. The figure (below) is a bit of a “chart crime” (so to speak), but it’s poignant nevertheless.
To the extent you think it makes sense to compare apples to oranges, the ISM apple is falling pretty far from the equities tree.
On the bright side, the color accompanying S&P Global’s US factory gauge painted a rosier picture.
“US manufacturing growth accelerated in March as strong demand and improving prospects countered the headwinds of soaring cost pressures and the Russia-Ukraine war,” Chief Business Economist Chris Williamson said Friday, adding that “order book growth has picked up as customers look to the further reopening of the domestic and global economies amid signs that the disruptions from the pandemic continue to fade.”
Williamson also suggested consumer price inflation may peak soon, and noted “especially encouraging” evidence of business confidence about the year ahead. Optimism among producers, he said, is “now the brightest since late-2020” despite “new uncertainties and geopolitical risks.”
You can write your own script. Everyone else is.
When you have 2 large economic shocks plus a political one domestically to boot- economic numbers are going to be hard to read over the short run especially. The trends tell you that growth is still going but it inflected to a slower path. If it continues we should see a slowdown possibly a recession in the next 6-18 months. I am willing to bet that raising the funds rate 2% in the next year is not in the cards.