The manufacturing sector contracted for the fourth month in a row in March, according to new data released by the Institute for Supply Management on Monday.
The pace of the decline accelerated as the impact of steep interest rate hikes continued to weigh on overall demand.
It has become evident that the manufacturing sector might have already slipped into a recession, which is consistent with what our RSM US Manufacturing Outlook Index has predicted for a while now.
The manufacturing ISM index dropped to 46.3 in March from 47.7 in February. Generally, if the overall index is below 48.7, it indicates contraction. For the subindices, the threshold is 50.
The manufacturing sector is one of the most rate-sensitive sectors as demand for manufactured goods has been curbed significantly by the Fed’s tightening campaign.
We expect the contraction within the sector to continue for the rest of the year as the overall economy descends into a recession. There will most likely be no interest rate cut this year to boost demand, according to the Federal Reserve’s projections.
The faster decline in manufacturing sentiment in March was driven by worsened activities in most subindices, the ISM reported. The new orders index, a proxy for future production, fell to 44.3 from 47 earlier. Current production remained in contraction mode, even though it inched up to 47.8 from 47.3.
March’s hiring dropped further as the manufacturing employment index dropped to 46.9 from 49.1, marking back-to-back declines in hiring sentiment as slower demand began to prompt hiring pullbacks.
From the payroll report, manufacturing job gains were negative in February, down by 4,000 jobs. The data suggests another decline in job gains in March.
The only good news was that price pressures eased somewhat in March as the prices paid index contracted to 49.2 after rising in February at 51.3. That might signal softer March inflation data, which will come out next week with the release of the March consumer price index.
The takeaway
We think that the Fed is now at or near its peak policy rate, as more cracks have appeared throughout the economy and as the central bank assesses the full impact of monetary tightening on the economy.
The Fed has signaled its willingness to engineer a “soft-ish landing” that could cause a mild recession with the manufacturing sector as one of the first targets to bring inflation down to its long-term goal.
So far, it does not seem as if we have seen the worst of the manufacturing recession.
