ISM Manufacturing Shows Slowing Business Activity

The latest Manufacturing ISM Report On Business reveals that the U.S. manufacturing sector contracted for the fifth consecutive month in March, with the Manufacturing PMI registering 46.3 percent, 1.4 percentage points lower than February's reading of 47.7 percent.

The New Orders Index also remained in contraction territory, falling to 44.3 percent in March from February's reading of 47 percent. The Production Index and Employment Index were negative, while the Prices Index dropped back into "decreasing" territory.

These data points show that new orders have fallen for the seventh consecutive month and that the manufacturing sector has continued its downward trend since June 2022. The fact that none of the subindexes that factor into the Manufacturing PMI were in growth territory is concerning, indicating that the overall economy contracted for a fourth consecutive month after 30 straight months of expansion.

Looking at other leading economic indicators, the Atlanta Fed GDPNow forecast for Q1 2023 has dropped to 1.7 percent, indicating that this quarter will be slower than Q4. This trend of contraction is worrying, and it could have serious implications for the broader economy. If the manufacturing sector continues to shrink, it will lead to job losses, reduced consumer spending, and weaker economic growth.

The report's Chair, Timothy R. Fiore, notes that "demand eased, with the New Orders Index contracting at a faster rate," and "output/consumption was negative." He also states that "price instability remains, but future demand is uncertain." These comments highlight the challenges that manufacturers face in a rapidly changing economic environment, where global supply chain disruptions and geopolitical uncertainties could further impact the sector's performance

The contraction in the manufacturing sector could have negative implications for the earnings of companies involved in the sector. As the demand for goods decreases, companies may need to reduce their production levels, leading to lower revenues and profits. Additionally, the decline in the Manufacturing PMI® and the New Orders Index could indicate that businesses are facing a challenging economic environment, which could lead to further pressure on their bottom line.

Moreover, the Q4 2022 GDP contribution from inventory building is a sign that Q1 is more vulnerable since that inventory is unlikely to be replaced. During Q4 2022, companies increased their inventory levels to meet the demand for goods. However, as the demand for goods has declined, companies may not need to replenish their inventory levels.

This situation could lead to ripple effect for the broader economy, as lower earnings could lead to reduced investment, weaker consumer spending, and a decrease in overall economic activity. We have already seen 11 months of falling leading economic indicators (LEI), and every time we’ve seen 6 months or move of falling LEIs we have seen a recession since 1960.