ISM Manufacturing Index Shows Continued, but Slower, Growth

In the Institute for Supply Management's Manufacturing survey released this morning, the manufacturing sector continued to grow in March, but at a slower pace than in February. The headline printed 51.3, a decrease of 2.9 points from February's reading of 54.2 percent, indicating expansion in manufacturing for the fourth consecutive month, but at a slower rate. It has bounced around this level for the past year, indicating no clear trend. Both the New Orders and Production Indexes reflected growth in March compared to February, albeit at slower rates, registering 51.4 and 52.2 vs. 57.8 and 57.6, respectively. Still, both metrics are now similar to where they were in December, and this drop is not outside the range of recent history. While the monthly drop might be notable, it does correspond to what we see in the ISM's Non-Manufacturing Index, which includes retailers and wholesalers, who say that inventories are “too high.” In that report, released March 5th, 27 percent of respondents said that their inventories are “too high,” while just 2 percent said that inventories are “too low.” As retailers and wholesalers work to trim stockpiles of unsold goods, they will buy fewer items from their suppliers. Note, however, in today's report on manufacturers, manufacturers believe their customers' inventories are a slightly on the low side on balance, providing contradictory data between the two surveys. However, six industries said their customers' inventories were too high, and seven said they were too low, providing some mixed data even within the same report. Thus, given the inventory issue, is too early to say that a pullback in new orders and production for manufacturers in today's report necessarily presages any easing in broader economic activity. Instead, manufacturers may see this slower rate of growth as temporary, as they indicate more hiring. The Employment Index registered 54.2, an increase of 1.6 points compared to February's reading of 52.6 percent. Of the 18 manufacturing industries, 10 reported growth in employment in March. Meanwhile, 24 percent of manufacturers reported growing numbers of staffers, while 16 percent reported fewer. However, in recent months, the Jobs Openings and Labor Turnover Survey (or JOLTS report) from the Bureau of Labor Statistics, shows that in January, the number of manufacturing jobs posted has barely budged from levels seen over the past six months, numbering 245,000. Given that some openings are to replace workers leaving their jobs, this does not point to a substantial increase in hiring this month. Hopefully, the sentiment in today's ISM report will point to increased hiring in future months. ISM's New Export Orders Index registered 56 in March, which is 2.5 points higher than the 53.5 reported in February. This month's reading represents the fourth consecutive month of growth in new export orders, and follows six months of contraction dating back to June 2012. Twelve industries reported growing exports while just two reported fewer export orders. This growth is encouraging, especially given the situation in Europe. Inflation pressures appeared to have eased. The Prices Index decreased 7 percentage points to 54.5, and the list of commodities up in price reflected far fewer items than in February. In March, 21 percent of respondents reported paying higher prices, 12 percent reported paying lower prices, and 67 percent of supply executives reported paying the same prices as in February. As such, there do not appear to be significant inflation pressures working through the supply chain, at least based on these data. Overall, the report shows growth, even if less than in February, and the elements of employment and exports are encouraging. However, we will need to see much stronger growth to be able to generate significant employment opportunities in this sector and signal improvements in broader economic activity.