Updated Apr 3, 2023 - Economy

Manufacturing comes off its high boil

ISM Manufacturing Index
Data: FactSet; Chart: Axios Visuals

So far in 2023, the flow of economic data has been a story of ups and downs: first, with several weeks of signs that the economy was slowing and inflation fading, then several weeks of data suggesting boom times were still here.

Driving the news: The Institute for Supply Management’s manufacturing activity fell from 47.7 in the previous month to 46.3 — the lowest since May 2020. Numbers below 50 indicate contraction, and by this index, manufacturing has been contracting for four straight months.

  • The falloff was even steeper in some key forward-looking ISM components, including big drops in new orders, inventories and employment.

Why it matters: The survey is the latest confirmation that the economy really is coming off 2022's high boil, despite a continued robust job market and other signs of strength.

Between the lines: For the moment, the details of the ISM data look not so much recessionary, but more like things coming into a healthier balance in manufacturing. That was evident in a steep decline in reported price pressures, which fell below 50, and falling backlogs and inventories.

  • At the same time, several categories of goods have continued shortages, particularly electronic components.

What they're saying: "New orders are starting to soften and supplier deliveries are improving slightly," said one electrical equipment manufacturer that participated in the survey. "This is allowing us to reduce [our] backlog and build a buffer in some categories."

  • "The supply chain disruption — particularly in electronics — is still significant compared to pre-pandemic conditions," the respondent said.
  • "Sales a bit down, and budgets being cut with a greater emphasis on savings," a chemical products manufacturer said.

Of note: "We are closely monitoring the global banking situation, but no impacts have been experienced or are expected at this time," said one manufacturer of miscellaneous goods.

The bottom line: "Softening demand for goods has paved the way for manufacturers to trim payrolls and lighten up their production schedules – the combined effect of which is clear as the manufacturing malaise spreads," said Jim Baird, chief investment officer of Plante Moran Financial Advisors, in a note.

Editor's note: This article has been corrected to note that the ISM index fell to 46.3 in March, from 47.7 in the previous month.

Go deeper