US factory activity shrinks for 5th month: ISM

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03/04/23

Economic activity in the US manufacturing sector contracted in March for a fifth month, led by falling demand, production and employment, according to the latest factory sector survey.

The Institute for Supply Manufacturing (ISM)'s manufacturing purchasing managers index (PMI) fell by 1.4 to 46.3 in March, the lowest since May 2020 when Covid-19 shutdowns prompted a recession, from 47.7 in February. The factory PMI levels also suggest a fourth month of contraction for the broader economy, according to PMI. Readings below 50 signal contraction, while those above that level suggest expansion.

Surging inflation amid the recovery from the Covid-19-induced recession of the spring of 2020, reinforced by higher energy prices in the wake of the Russian invasion of Ukraine, prompted the US Federal Reserve in 2022 to enact its most aggressive interest rate increases since the 1980s. That hit demand for houses, cars, equipment and other large ticket items, threatening to push the US into another recession, but a still robust labor market has kept the economy in expansion mode.

The new orders index fell to 44.3, down by 2.7, while the production index rose by 0.5 to 47.8, signaling a diminishing pace of contraction.

"The US manufacturing sector contracted again," PMI said. "The March composite index reading reflects companies continuing to slow outputs to better match demand for the first half of 2023 and prepare for growth in the late summer/early fall period."

The prices index fell by 2.1 to 49.2, showing falling prices. The employment index fell by 2.2 to 46.9, suggesting contraction in the factory labor market. The new export orders index fell by 2.3 to 47.6. The backlog of orders index fell by 1.2 to 43.9, showing a sixth month of contracting backlogs, and the inventories index fell to 47.5 from 50.1, signaling falling inventories.

"Supply chains are now ready for growth, as panelists' comments support reduced lead times for their more important purchases," ISM said.

"We are closely monitoring the global banking situation, but no impacts have been experienced or are expected at this time. Ongoing tensions between the US and China are another issue to watch," said a survey respondent in the miscellaneous manufacturing segment.

By Robert Willis

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