The Institute for Supply Management’s (ISM) purchasing managers’ index (PMI) declined unexpectedly from 54.2 in February to 51.3 in March. The composite index was predicted to show a modest increase in manufacturing activity, much as I wrote in this morning’s Monday Economic Report and consistent with similar data from Markit. Instead, it moved lower on a deceleration of new orders and production.
The sample comments provide some context for this. As one printing manufacturer wrote, “Things seem slightly better than last year, but still not great.” This sentiment is one that we have noted before. While there has been progress from the pullback in activity observed late last year, the economy has still not seen the strength that it had at the beginning of 2012. Governmental policies have not helped, with respondent comments specifically mentioning the across-the-board spending cuts, slowing medical reimbursements from Medicare, and continuing regulatory uncertainties.
Of course, there were also those who noted “brisk” business, including those answering the survey from the automotive, furniture, and wood products sectors.
Looking specifically at the subcomponents of the ISM report, the index for new orders dropped from 57.8 to 51.8, indicating a fairly significant easing for the month of March. At the same time, sales have risen for three straight months, helping to justify the “slightly better than last year” comment discussed above.
There was also good news on the trade front, with the new export orders index rising from 53.5 to 56.0. This suggests that improving economies worldwide – outside of Europe – have helped increase manufacturers’ sales overseas. We should learn more about this on Friday with the release of official trade data from the Census Bureau.
Many of the other data were mixed. The growth of production activity eased, mirroring the direction of new orders. Pricing pressures and inventories also declined, with the stock of inventory contracting for the first time since December. In contrast, the pace of hiring appears to have improved. The employment index rose from 52.6 to 54.2. This still indicates modest growth in hiring, but it is notable that the pace of employment picked up even as overall sentiment about the current environment softened.
The ISM PMI data moved in the opposite direction of the PMI data from Markit. A couple weeks ago, we discussed the “flash” – or early estimate – of the Markit Manufacturing PMI data. Earlier today, the final version of the PMI was released, with the findings mostly similar to what was reported previously. The composite index edged marginally higher from 54.3 to 54.6. Outside of the increase, which was slower than originally predicted, the various subcomponents went in different directions. New orders were flat, with output easing and exports and employment picking up. In that regard, the data were not as different below the surface as the headline numbers might suggest.
The March PMI data show that the manufacturing sector continues to expand, but the pace of growth is still somewhat muted. To paraphrase one of the survey respondents, growth in manufacturing activity is good, but not great. Policies from Washington are clearly not helping, with some manufacturers noting budget sequestration or various regulatory actions as either a drag on their business or the source of persistent uncertainties. On the positive side there were also some encouraging signs in these data, with the pace of hiring picking up and notable improvements in manufacturing goods exports. We hope this translates into the creation of more jobs in the March jobs report due out on Friday.
Chad Moutray is the chief economist, National Association of Manufacturers.
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