The ISM Manufacturing Index gained a sliver of ground in April, up to 47.1 from 46.3 in March. That is slightly better than market expectations, but marks six months of contractionary readings for the factory sector.
Demand eased again, with new orders contracting, albeit at a slower rate (45.7 in April vs. 44.3 in March). New export orders remained just in contractionary territory at 49.8 percent, customer inventories entered the low end of “too high” – a negative for future production – and the backlog of orders continued to ease (43.1 in April versus 43.9 in March).
Output/consumption measures were in positive territory, with the production index up to 48.9 from 47.8 in March and employment moving back into expansion territory at 50.2 from 46.9 in March.
The input side is described as being accommodative to future growth. Supplier deliveries are speeding up, as evidenced by the sub-index falling to 44.6 from 44.8 in March and inventories fell to 46.3 from 47.5 in March. However, the prices index moved back into expansion territory at 53.2, from 49.2 in March.
Despite the improvement in the headline index, fewer industries are reporting growth. Only five of 18 manufacturing industries reported growth in April. And of the six largest manufacturing industries, only two recorded growth in April – petroleum and coal products and transportation equipment.
Key Implications
While sentiment in the factory sector improved in April, the index remained below the 50-level consistent with expansion. Manufacturing remains in a cyclical slowdown as the impact of higher borrowing costs weighs on activity and demand for goods has downshifted from its pandemic heights.
Demand is likely to remain soft for a while yet, as consumer demand is expected to continue to slow through 2023. Against a backdrop of elevated recession concerns, it is worth remembering that manufacturing is more cyclical than the economy as a whole. It has seen numerous downturns outside of recessions over the past 50 years. Also, the index typically gets to readings in the low 40s during recessions. One silver lining is that the ongoing improvement on supply chains may help relieve the pent-up demand in the automotive sector over the coming year.
