A key gauge of U.S. factory activity dipped into contraction territory in March, new data released Wednesday shows.
The Institute for Supply Management’s manufacturing index dipped to 49.1 in March, from 50.1 a month earlier, and above the consensus of 44.5. A reading below 50 indicates contraction in the manufacturing sector, which accounts for around 11% of the U.S. economy.
The smaller-than-expected drop in the overall manufacturing index reflected a rise in ISM’s survey measure of supplier deliveries to a reading of 65 this month from 57.3 in February. A lengthening in suppliers’ delivery time would typically be associated with increased activity, a positive contribution, but in this case, slower supplier deliveries indicate supply shortages rather than stronger demand.
The ISM’s new orders and employment indices both fell to their lowest levels since 2009, down 7.6 and 3.1 points respectively compared to February. The ISM’s measure of new orders, typically tracked as a leading indicator of a downturn, hit an 11-year low in March, reinforcing economists’ views that the economy was already in a recession. The drop in the employment index supports many economists’ views that the longest employment boom in U.S. history – which started in October 2010 – may have ended in March.
The drop in the ISM’s index was less than expected, given that more than half the country is in some form of lockdown as states and local governments try to contain the spread of the coronavirus.
Survey respondents’ comments “were negative regarding the near-term outlook, with sentiment clearly impacted by the coronavirus (COVID-19) pandemic and energy market volatility,” according to the ISM’s report.
What lies ahead?
The drop in the ISM’s March manufacturing index—also known as the Purchasing Managers Index or PMI—was preceded by other, more dismal regional reports, as well as the RSM Manufacturing Outlook Index, which took a nosedive in March to recession levels. The RSM index reversed the gains of the first two months of the year and dropped more than two standard deviations below levels associated with normal manufacturing conditions.
We do not expect a jump in the ISM’s manufacturing index in the near-term and are recommending our clients focus on the evolving issues related to the coronavirus crisis. It is crucial to mitigate risks and plan accordingly, while at the same time taking measures to increase business resilience long term.