By | April 2, 2023

WASHINGTON, April 3 (Reuters) – U.S. manufacturing activity fell to the lowest level in nearly three years in March as new orders fell, and activity may decline further amid tightening credit conditions.

The Institute for Supply Management (ISM) survey on Monday also showed a continued decline in factory employment last month, but inflationary pressures eased, with supplier deliveries the fastest since March 2009. Rising borrowing costs as the Federal Reserve battles high inflation have dampened demand for goods, which are usually bought on credit.

“Manufacturing activity is going deeper into the red and the million dollar question is whether sputtering factory output will spread to the rest of the economy,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “New orders fell sharply in March and that could well lead to production shutdowns and more layoffs later in the spring and summer.”

The ISM manufacturing PMI fell to 46.3 last month, the lowest reading since May 2020, from 47.7 in February. Economists polled by Reuters had predicted the index would fall to 47.5.

It was the fifth consecutive month that the PMI remained below the 50 threshold, which indicates a slowdown in manufacturing. But so-called hard data has suggested that manufacturing, which accounts for 11.3% of the economy, continues to grow moderately.

Manufacturing expanded at a 4.5% annual rate in the fourth quarter, the government reported last week. Reports last month also showed that capital goods orders excluding aircraft had a slight increase in February as did manufacturing output.

According to the ISM, 70% of manufacturing gross domestic product fell in March, down from 82%. However, it noted that more industries declined sharply last month.

“The share of manufacturing GDP with a composite PMI estimate at or below 45 percent, a good barometer of overall manufacturing slack, was 25 percent in March, compared with 10 percent in February,” said Timothy Fiore, chairman of the ISM Manufacturing Business Survey Committee .

Of the six largest manufacturing industries, only petroleum and coal products and machinery experienced growth in March. Other manufacturing industries reporting growth were printing and related support activities, miscellaneous manufacturing, fabricated metal products and primary metals.

  • Twelve industries that reported declines include furniture and related products, non-metallic mineral products, textile mills, transportation equipment and computer and electronic products, and electrical equipment, appliances and components.
  • The comments from the manufacturers were mostly disappointing. The transportation equipment maker said “sales are slowing at an increasing rate, allowing us to accommodate backorders at a faster-than-expected pace.”
  • Manufacturers of electrical equipment, appliances and components reported that “new orders are beginning to soften.” The chemical products maker said “sales (were) down a bit and the budget is being cut with a greater emphasis on savings.”
  • But makers of food, beverage and tobacco products said “business is generally good, with input costs falling in some areas and rising in others.”
  • US stocks traded mixed. The dollar fell against a basket of currencies. US Treasury bond prices rose.


The ISM survey’s forward-looking new orders sub-index fell to 44.3 last month from 47.0 in February. Demand may come under pressure following the recent failure of two regional banks, stressing the financial sector. Banks have tightened lending standards, which can make it harder for small businesses and households to access credit.

According to a Goldman Sachs analysis, the manufacturing industry could be hit hard by a downturn in bank credit as companies rely on bank loans for working capital or to finance capital expenditure. But it noted that manufacturers that rely on bank credit also “tend to have larger businesses that, other things being equal, will have an easier time finding alternative sources of capital.”

The workforce continued to shrink last month, reflecting the collapse in demand as well as improved supply chains. The ISM survey’s measure of supplier deliveries fell to 44.8, the lowest level since March 2009, from 45.2 in February. A reading below 50 indicates faster deliveries to factories.

  • As supply improves, factory-gate inflation recedes. The ISM survey’s measure of producer prices fell to 49.2 from 51.3 in February.
  • But inflation may remain high. Saudi Arabia and others OPEC+ oil producers announced on Sunday further oil production cuts of about 1.16 million barrels per day. The prices of services also remain high.
  • The Fed last month raised its overnight benchmark interest rate by a quarter of a percentage point, but indicated it was on hold on further increases in borrowing costs due to concerns in financial markets. The US Federal Reserve has raised its key interest rate by 475 basis points since last March from near zero to the current range of 4.75%-5.00%.

Weak demand left factories with little incentive to increase employment. The survey’s measure of factory employment fell to 46.9 from 49.1 in February.

This measure has fluctuated up and down, making it an unreliable predictor of manufacturing wages in the government’s closely watched employment report. Factory payrolls fell in February after rising for nearly two years.

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao


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