The ISM manufacturing index dipped half a point to 57.2 in March, a level still consistent with solid activity in the factory sector. Hiring jumped over the month, while rising input costs pressures did not let up.
Dip in March, but Factory Activity Still Solid
Consistent with many of the regional purchasing managers indices released over the past few weeks, growth in the manufacturing sector looks to have cooled a touch last month. The ISM manufacturing index edged back half a point to 57.2 in March. At that level, however, the factory sector is still expanding at a solid clip.
The largest drag on the headline this month was a pullback in current activity. The production index edged back 5.3 points and is now slightly below its six-month average. The pipeline for activity, however, remains strong. New orders were little changed at 64.5 and remain near a three-year high.
Much of the strength in new orders stems from the improved global backdrop. The index on export orders rose 4.0 points in March. While not seasonally adjusted, the index indicates the fastest pace of export growth since late 2013, when the value of the broad trade-weighted dollar was more than 20 percent lower.
Inventories contracted slightly over the month, which also weighed on the composite index. After entering expansion territory for the first time since mid-2015 in February, the inventory index fell 2.5 points to 49.0. That said, the ISM finds that readings above 42.9 are consistent with growth in manufacturing inventories as measured by the Bureau of Economic Analysis, which is consistent with our call that inventories will not be a drag on growth this year like they were in 2016.
Another Month of Solid Hiring in Manufacturing
Partially offsetting the weaker – although not outright weak – readings in production, new orders and inventories that led to a lower headline in March was improvement in supplier deliveries and employment. Supplier delivery times lengthened in March, with the index rising 1.1 point to 55.9. The biggest improvement in sub-indices, however, came from the employment component. Factory hiring looks to have strengthened materially in March, with the employment index up nearly five points to the highest level since mid-2011. The jump suggests another solid gain in manufacturing payrolls in March, which have increased an average of 19,000 jobs over the past three months.
Inflation Pressures Mounting
Price pressures continue to mount in the factory sector. Lower oil prices in the second half of the month do not appear to have been passed on to manufacturers, who reported no commodities down in price in March. The prices paid index rose to 70.5, which is the fastest rise in input prices in nearly six years and supports our outlook for inflation to rise further over the course of the year.
