US April ISM Manufacturing Slips Back into Slight Contraction, Hit by Pullback in New Orders, Surge in Costs, but Employment Shows Improvement

–ISM Manufacturing Index 49.2 Vs. 50.3 in March; Median Forecast 50.0
–ISM’s Fiore: New Orders Drop ‘A Bit Disappointing’ but Not Overly Concerning
–Fiore: Still Think Employment on Way Toward Growth in May or June
–Fiore: Outlook for Prices Uncertain Amid Rising Energy, Commodities Markets

By Max Sato

(MaceNews) U.S. manufacturing activity slipped back into slight contraction in April after posting the first expansion in 17 months in March, hit by a “disappointing” decline in new orders and a renewed surge in raw materials costs, but employment conditions continued improving toward growth, data from the Institute for Supply Management released Wednesday showed.

The sector index compiled by the ISM, which shows general direction, fell 1.1 percentage points to 49.2 in April after rising 2.5 pints to 50.3 in March and falling 1.3 points to 47.8 in February. It was weaker than the median economist forecast of being neutral at 50.0.

“Demand remains at the early stages of recovery, with continuing signs of improving conditions,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. “Production execution continued to expand in March, but at a slower rate of growth than in prior months. Suppliers continue to have capacity but work to improve lead times, due to their raw material supply chain disruptions.”

Panelists’ comments in April indicated a slowing of staff-cutting efforts, he said. The approximately 1.7-to-1 ratio of hire versus reduction comments is the highest since September 2023, when it was 2-to-1, he added.

Fiore told reporters that the decline in new orders was “a bit disappointing” but “doesn’t bother me much,” and that he still believes employment is on its way toward expansion in the next few months. The overall index is in a range of 49 to 52, and thus could show another slight contraction in May but new orders are unlikely to “sag significantly from where we are today,” he predicted.

Food and beverages are “the biggest disappointment” in April, he said, adding that it is odd because the industry should be expanding ahead of the summer, as it did in March.

Last month, Fiore said new orders and production were unlikely to fall back into negative territory in coming months, and predicted that employment conditions should recover to expansion in May or June.

April saw a jump in prices paid by manufacturers as higher energy markets pushed up costs for steel, aluminum and plastics, Fiore said. The biggest impact was seen in the prices for computers and electronics in April but the outlook for overall prices remains uncertain amid the prevailing “no-landing” scenario under which the U.S. economy is unlikely to contract despite high borrowing costs, he said.

Asked about the impact of sticky inflation and resilient labor market conditions on the Federal Reserve’s restrictive monetary policy stance, Fiore said, “We feel we are still sitting on a rate cap and we are not going to be seeing increased rates, and hopefully that won’t change .… We are probably looking at a delay in any cut.”

From the manufacturing sector’s viewpoint, “there is no real danger as long as they are not raising rates,” he said.

Comments from ISM member firms were mixed in the April report.

“Conditions are improving as demand is starting to recover,” a chemical producer told the ISM. “Costs continue to be a major concern as suppliers that rapidly increased prices in the follow-up from COVID-19 are slow to return to pre-pandemic levels.”

A transportation equipment maker noted that operational output is still strong and that the supply chain has the capacity to support. “International supply chain risks have been minimized, but the frequency of supplier insolvencies or bankruptcies appears to be increasing,” it said.

“Business is slowing down — it has been a gradual decline for the last several months,” a fabricated metal producer said. “We are not seeing new orders at last year’s level, or at this year’s budgeted levels.”

Among the five subindexes that directly factor into the manufacturing PMI, the new orders Index fell 2.3 percentage points to a four-month low of 49.1 in April after rebounding 2.2 points to 51.4 in March and falling 3.3 points to 49.2 in February. It popped 5.5 points to 52.5 in January, posting the first growth in 17 months. The production index slumped 3.3 points to 51.3 after jumping 6.2 points to 54.6 in March and falling 2.0 points to 48.4 in February.

The employment index contracted for the seventh straight month but improved for the second straight month, rising 1.2 points to 48.6 in April after gaining 1.5 points to 47.4 in March.

The delivery performance of suppliers to manufacturers was “faster” for the second straight month after one month of slowing preceded by 16 straight months in “faster” territory. The supplier deliveries index dipped 1.0 point to 48.9 after edging down 0.2 point to 49.9 in March and rising 1.0 point to 50.1 in February. This is the only ISM subindex that is inversed; a reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases.

The manufacturing inventories index contracted for 15 months in a row. It was unchanged at 48.2 in April after climbing 2.9 points in March.

Among other subindexes, the customers’ inventories index showed contraction (below 50) for the fifth straight month but rose 3.8 points to a four-month high of 47.8 after falling 1.8 points to 44.0 in March. Fiore said it is at the ‘just right’ level, neutral for future production.

The prices index indicated growth for the fourth month in a row after showing the first increase in nine months in January, when member firms agreed to pay higher costs for some commodities at the start of the new year. The index surged 5.1 points to 60.9 in April after rising 3.3 points to 55.8 in March, hitting the highest since 78.5 in June 2022.

The backlog orders index stayed below 50, and thus in contraction, for 19 months. It fell 0.9 point to 45.4 after being unchanged in March and rising 1.6 points to 46.3 in February, which was the highest since 50.9 in September 2022. It slumped 5.6 points to 37.5 in May 2023, which is the lowest since the Great Recession (33.6 in February 2009). “The index remained in contraction in April, as new order rates and production output were insufficient to allow backlogs to grow,” Fiore said.

The new export orders index slipped back into contraction in April after showing two months of expansion and contracting for eight months through January.  It slipped 2.9 points to 48.7 after being unchanged in March and surging 6.4 points to 51.6 in February for the highest since 52.6 in July 2022 and falling 4.7 points to 45.2 in January.

The ISM main index had been on a downtrend since it fell 2.7 points to 53.4 in June 2022 but it seems to have hit a bottom in June 2023 at 46.4, the lowest since May 2020, when the index at 43.5 was recovering from a recent low of 41.8 the previous month during the first wave of the pandemic. The pandemic high was 64.0 recorded in March 2021. The all-time low is 29.4 hit in May 1980.

To assess the overall economic climate, the latest ISM survey indicates the overall economy grew for the 48th straight month after one month of contraction in April 2020. The ISM’s manufacturing PMI reading above 42.5, over time, generally indicates an expansion of the U.S. economy. The April survey showed that 34% of manufacturing gross domestic product contracted, up from 30% in March but down from 40% in February and 62% in January.

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