Key Manufacturing Indicator Continues Slide, But Can The Overall Economy Remain Resilient?

The Institute of Supply Management’s (ISM) Purchasing Manager’s Index fell from 47.7 in February to 46.3, the lowest since May 2020 and the weakest since 2009. The ISM’s Purchasing Manager’s Index (PMI) is used as an industry barometer along with the Fed’s Capacity Utilization Rate. A reading above 48.7 percent for the PMI indicates that manufacturing is expanding in the US, and below that number means that it is contracting.

History shows that each time since 1983 that the index fell below 43 percent, “speculative grade” companies began to panic.

Mixed signals in macro outlook

March’s reading marks the fifth straight month that the ISM’s PMI remained below 50 percent, which is a sign of a contraction for the industry, but other data suggested that there was moderate growth in manufacturing, which counts for more than 11% of the overall economy.

It has been said that even with the pullback in manufacturing, stats in the rest of the economy are not showing convincing signs of a recession. As of last Wednesday, the service sector was still strong, and if that trend continues, the rest of the economy is expected to remain stable.

“Rising energy costs, impact of interest rates, supply chain, and other external factors are massive headwinds for manufacturing, but not all sectors have been impacted equally,” said Lawrence Stoklosa, UHY manufacturing practice costing specialist. “We’ve been tracking these factors as presented during our annual manufacturing outlook, and though the circumstances are challenging, there are real opportunities for long-term growth for companies that position themselves properly.”

Different stories in specific sectors

In addition to the overall contraction signaled by the PMI, various sectors of the manufacturing industry have reported varying levels of activity with the majority following a trend of contraction. Furniture and related products, nonmetallic mineral products, textile mills, transportation equipment, and computer and electronic products as well as electrical equipment, appliances, and components all reported contractions.

Sectors showing growth included printing and related support activities, miscellaneous manufacturing, fabricated metal products and primary metals, petroleum, coal, and food, beverage, and tobacco products.

Backlogs clear up, supply chain eases, prices fall

With a decrease in demand, work backlogs shrunk in the last month reflecting improved supply chains. On another positive note, inflation for manufacturers saw a decrease, as well as the ISM’s survey measure of prices paid by manufacturers, dropped to 49.2 from 51.3 in February.