May 1, 2024

The Institute for Supply Management’s index of conditions in the manufacturing sector declined 1.1 points in April to 49.2 after rising 2.5 points in March.  After a brief climb above the breakeven point of 50.0, the index retreated slightly in April.   While 50.0 is the breakeven point for the manufacturing sector, a level of 42,5 is generally regarded as the breakeven point for the economy as a whole.  A level of 49.2 is associated with a GDP increase of 1.9%.

The ISM organization does a similar survey for the services sector.  The ISM index of conditions in the service sector for April will be released on Friday, May 3.

The Institute for Supply Management Chair for the Survey Committee Timothy Fiore said, “Demand remains at the early stages of recovery, with continuing signs of improving conditions. 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. Thirty-four percent of manufacturing gross domestic product (GDP) contracted in April, up from 30 percent in March. More importantly, the share of sector GDP registering a composite PMI® calculation at or below 45 percent — a good barometer of overall manufacturing weakness — was 4 percent in April, higher than the 1-percent figure in March, but an indication of better health than the 27 percent recorded in January. Among the top six industries by contribution to manufacturing GDP in April, none had a PMI® at or below 45 percent,”

Comments from respondents include the following:

  • “Conditions are improving as demand is starting to recover. 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.” [Chemical Products]
  • “Sales continue to exceed expectations in 2024. The forecasted dip in commercial vehicle production volumes appears to be avoided. Operational output is still strong, and 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.” [Transportation Equipment]
  • “Order flow has stabilized. It took some customers longer to replenish their supply chain network after the fourth-quarter rush we commonly have. Order rates are expected to remain stable through August.” [Food, Beverage & Tobacco Products]
  • “Some small indications of market improvement in China for our instruments and technology. Recovery is still slower than we had hoped, and macroeconomic uncertainty remains in Europe and the Middle East, as well as domestically in the U.S. with ongoing inflationary pressures and anticipation for the (upcoming) election.” [Computer & Electronic Products]
  • “Market conditions have definitely softened. Thankfully, our backlog is strong and will get us through the year. When conditions improve as expected later this year, we will be in a good position to continue building the business. We are a manufacturer of automated packaging equipment for the food and beverage industry, and with a continued shortage of workers, our customers are requiring more and more automation.” [Machinery]
  • “Business is slowing down — it has been a gradual decline for the last several months. We are not seeing new orders at last year’s level, or at this year’s budgeted levels.” [Fabricated Metal Products]
  • “There has been a lot of volatility in sales. On average, our sales look flat, but the volatility is concerning.” [Electrical Equipment, Appliances & Components]
  • “Business remained strong through the first quarter and has started strong for the second quarter. Commercial construction is still going well but on a regional basis, with the Southeast the strongest.” [Nonmetallic Mineral Products]
  • “The major factor affecting our business is the uncertainty of the Federal Reserve’s handling of interest rates, which will affect our customers’ businesses, thereby affecting ours.” [Plastics & Rubber Products]
  • “Business is stable, and orders have been consistent. We’re quoting new business for the factory, and automotive builds continue at averages but not near maximum outputs. Workforce is stable, with the turnover ratio dropping considerably. Salaries and hourly rates increasing to meet inflationary pressures.” [Primary Metals]

The orders component fell 2.3 points in April to 49.1 after rising 2.2 points in March,   Basically, they are bouncing around close to the breakeven level of 50.0.   . Fiore noted that “Of the six largest manufacturing sectors, three (Computer & Electronic Products; Chemical Products; and Fabricated Metal Products) reported increased new orders. Panelists indicated continuing improvement in demand, with comments of ‘softening’ new orders at their lowest level since the special reporting of such sentiment began in May 2022,”

The production component fell 3.3 points in April to 51.3 after having jumped 6.2 points in March to 54.6.  The March reading was the fastest pace of production since the summer of 2022.  The index pulled back in April but remained in expansion territory in April.  An index reading above 52.2 is generally consistent with an increase in industrial production.Thus, industrial production is likely to decline in April.

The delivery performance of suppliers to manufacturing organizations fell 1.0 point in April to 48.9 after having fallen 0.2 point in March to 49.9..  This means that supplier deliveries were essentially unchanged in April.  Fiore noted that, “Suppliers continue to support their customers adequately as suppliers deliver faster, make more reliable promises and slowly reduce lead times,”

The employment index rose 1.2 points in April to 48.6 after having climbed 1.5 points in March.   Fiore noted that,  “The index indicated employment contracted for the seventh month in a row (but at a slower rate in April) after one month of expansion and three months of contraction before that. Of the six big manufacturing sectors, two (Transportation Equipment; and Computer & Electronic Products) expanded employment in April. Many Business Survey Committee respondents’ companies are continuing to reduce head counts through layoffs (which accounted for 50 percent of reduction activity, down from 76 percent in March), attrition and hiring freezes. Panelists’ comments in April indicated a slowing of staff-cutting efforts. The approximately 1.7-to-1 ratio of hire versus reduction comments is the highest since September 2023, when it was 2-to-1.”

The backlog of orders fell 0.9 point in April to 45.4 after having been unchanged in March.  Fiore noted that, “The index remained in contraction in April, as new order rates and production output were insufficient to allow backlogs to grow.”

Customer inventory levels rose 3.8 points in April to 47.8 after having fallen 1.8 points in March.   Fiore said that, “Customers’ inventory levels decreased at a slower rate in April, with the index moving upward in ‘too low’ territory. Panelists report their companies’ customers have sufficient amounts of their products in inventory, which is considered neutral for future new orders and production.”

With a decline in the orders index and an increase in customer inventories the ratio of orders to inventories fell 0.2 point in April to 1.0 after having risen 0.1 in March. The 1.0 level for this index suggests that production could be relatively unchanged in the months ahead.

The prices paid component jumped 5.1 points in April to 60.9 after having gained 3.3 points in March.   Fiore noted that,  “The Prices Index indicated strong expansion in April, with its highest reading since June 2022 (78.7 percent). Commodity prices continue to increase, especially crude oil, aluminum, steel and plastics. Thirty-one percent of companies reported higher prices in April, compared to 24 percent in March.”   A price index above 52.8 is generally consistent with the Bureau of Labor Statistics PPI index for Intermediate Materials.

We expect GDP to climb at roughly a 3.0% pace in the second quarter followed by 2.0-2.5% growth in the final two quarters of the year.

Stephen Slifer

NumberNomics

Charleston, S.C.