The Institute for Supply Management (ISM) index of manufacturing for April declined two points to 57.3, slightly worse than market expectations of a one point decline to 58.3. Despite the decline, the index remains in expansionary territory for the 20th consecutive month.
All of the subindices that comprise the headline index recorded declines in the month, with the exception of supplier deliveries (+0.5 to 61.1). The three largest declines (indicating decelerating growth) occurred in the production (-3.8 to 57.2), employment (-3.1 to 54.2), and inventories (-2.6 to 52.9) subindices.
Prices paid rose 1.2 points to 79.3, hitting yet another new cycle high and the highest level since April 2011 (82.6). Survey respondents reported rising commodity prices across industry sectors, while also reporting shortages of capacitors, electrical components, resistors, and hot rolled steel.
The spread between new orders and inventories – a good leading indicator of activity – rose to 8.3 (+1.9 points) in April, owing to the decline in inventories outpacing that for new orders. Overall this indicator remains consistent with manufacturing activity continuing to expand through the first half of 2018.
Of the 18 reporting manufacturing industries, 17 recorded growth in April. No industries reported a decline in the month.
Key Implications
The hot U.S. manufacturing sector appears to be reaching its maximum current capacity limit. Survey respondents report strong demand from domestic and foreign sources, but labor and component shortages are starting to take their toll on production. As a result delivery times, the backlog of orders, and input prices all continue to rise.
Although steel and aluminum tariffs have yet to take effect, with most advanced economy trade partners largely exempt for at least another month, they continue to drive anxiety in manufacturers about shortages of steel, driving up the price of the commodity. Moreover, the announced tariffs appear to be affecting expansion plans, with at least one survey respondent citing that ‘business planning is at a standstill until [the tariffs] are resolved’.
With manufacturing activity slowing from a very strong pace of expansion in Europe, many are worried that global economic momentum is starting to slip. We continue to anticipate global growth to expand 3.8% in 2018, but momentum has clearly slowed a touch earlier than anticipated in Europe and some other regions. While the proposed tariffs announced by the U.S. administration remain more bluster than bite, they are acting to elevate economic policy uncertainty and denting business confidence both domestically and abroad.
