April 6, 2025
The Institute for Supply Management’s index of conditions in the manufacturing sector declined 1.3 points in March to 49.0 after having fallen 0.6 point in February. For the previous two months this index was above the break-even level of 50.0 but if fell below at threshold in March as talk about tariffs has made manufacturers nervous. A level of 49.0 is associated with a GDP increase of 1.9%. While the drop in March is discouraging, the reality is that this index was between 47.0-49.0 for the past two years so one should not get too concerned quite yet.
The ISM organization does a similar survey for the services sector. The ISM index of conditions in the service sector for March will be released on Wednesday, April 3.
The Institute for Supply Management Chair for the Survey Committee Timothy Fiore said, “In March, U.S. manufacturing activity slipped into contraction after expanding only marginally in February. The expansion in both February and January followed 26 consecutive months of contraction. Demand and output weakened while input strengthened further, a negative for economic growth. Indications that demand weakened include: the (1) New Orders Index falling further into contraction territory, (2) New Export Orders Index dropping into contraction, (3) Backlog of Orders Index contracting at a faster rate, and (4) Customers’ Inventories Index remaining in ‘too low’ territory. Output (measured by the Production and Employment indexes) also weakened. Factory output (production) contracted in March, indicating that panelists’ companies are revising production plans downward in the face of economic headwinds. The Employment Index moved deeper into contraction, as panelists’ companies continued to release workers. Companies continued to cite ‘attriting down’ as the best process, as opposed to layoffs. Inputs — defined as supplier deliveries, inventories, prices and imports — expanded. All four indexes indicated expansion, which is not a positive sign when demand is moving in the opposite direction. Inventories growth is a temporary move to avoid tariffs and will decline when such trade issues are resolved.
Comments from respondents include the following:
- “Complex markets saw a surge in volume buying in anticipation of 2025 being slightly better than 2024. In March, however, all markets saw a slowdown, with fear and inventory stocking to hold through a potential crisis.” [Chemical Products]
- “Acute shortages continue to impact supply chain continuity. Chinese restrictions on critical minerals such as germanium have caused major shortages, resulting in all supply needed in 2025 already assumed — and, not surprisingly, significant price increases as a result. Tariffs are causing minor ripples at the moment in securing supply, with purchase order terms narrowing due to uncertainties. A&D (aerospace and defense), which has been very resilient, is starting to see questionable medium- to long-term demand due to governmental policy, including retaliatory actions taken by foreign countries with foreign military sales.” [Transportation Equipment]
- “Customers are pulling in orders due to anxiety about continued tariffs and pricing pressures.” [Computer & Electronic Products]
- “Starting to see slower-than-normal sales in Canada, and concerns of Canadians boycotting U.S. products could become a reality.” [Food, Beverage & Tobacco Products]
- “Business condition is deteriorating at a fast pace. Tariffs and economic uncertainty are making the current business environment challenging.” [Machinery]
- “New order levels have increased and are better than expected. We suspect that our customers are trying to build inventory at current prices to get ahead of expected tariff and related cost increases. We expect this surge in demand to be short-lived.” [Fabricated Metal Products]
- “Demand has been stable, consistent with last year. No evidence of growing demand. Tariff impacts and mitigation strategies are a daily conversation.” [Electrical Equipment, Appliances & Components]
- “Newly implemented tariffs are significantly impacting gross profits. Canada’s new tariffs on U.S. goods are significantly impacting orders from that country. Quotes and sales are lower from Europe due to the threat of retaliatory tariffs.” [Miscellaneous Manufacturing]
- “Worldwide economic instability has really begun to impact our oil and gas business. Aside from the change in the U.S. administration, the economies of China, India and Europe are drivers in what we believe is the next cyclical trough.” [Petroleum & Coal Products]
- “Bearish market sentiment and tariff applications and costs have dominated discussions over the past month and should continue to dominate markets until a clear path forward is determined. Overall concern is whether or not demand destruction will occur with higher pricing.” [Primary Metals]
The orders component declined 3.4 points in March to 45.2 after having fallen 6.5 points in February. This is the lowest reading since May 2023 (43.4 percent) for the New Orders Index, which hasn’t indicated consistent growth since a 24-month streak of expansion ended in May 2022. Of the six largest manufacturing sectors, two (Petroleum & Coal Products; and Food, Beverage & Tobacco Products) reported increased new orders. Three (Machinery; Transportation Equipment; and Chemical Products) reported declines. Panelists noted a weakening level of demand performance, with a 1-to-2 ratio of positive comments versus those expressing concern about near-term demand, a clear decline from February. Orders continue to slow, as discussions about who will pay for potential tariff costs are the prime topic of negotiations between buyers and sellers,” says Fiore
The production component declined 2.4 points in March to 48.3 after shrinking by 1.8 points in February. Prior to January’s reading, the index was in contraction territory for eight consecutive months, with the last reading above 50 percent in April 2024, “Production levels in March showed a marked decrease for the first time in 2025, as order books remain weak and new orders continue to decline, causing head-count reductions and lack of capital investment,” says Fiore.
The delivery performance of suppliers to manufacturing organizations declined 1.0 point to 53.5 after having risen 3.6 points in February. This measure indicates the proportion of companies that are reporting slower delivery times. Hence, a reaching above 50.0 indicates that delivery times actually slowed slightly in February and March. Fiori noted that, “Deliveries continued to be marginally strained as suppliers struggled to meet accelerated delivery requests from customers and as suppliers and panelists’ companies negotiate who pays for current tariffs,” says Fiore.
The employment index declined 2.9 points in March to 44.7 after having fallen 2.7 points in February. “The index has returned to contraction after expanding for a single month. Since May 2022, the Employment Index has contracted 28 of the last 35 months. Of the six big manufacturing sectors, none expanded employment in March. Respondents’ companies continue to reduce head counts through layoffs, attrition and hiring freezes, with an approximate 1-to-1.3 ratio of hiring versus staff-reduction comments, supporting an acceleration of head-count reductions due to the uncertain near- to mid-term demand. Freezing and attrition were the primary tools used for the second straight month, in lieu of the more dramatic and costly layoff process,” says Fiore. An employment index above 50.3 is generally consistent with an increase in the BLS data on manufacturing employment.
The backlog of orders declined 2.3 points in March to 44.5 after having risen1.9 points in February. ““Given the state of weak new orders and consistent production output, the hoped-for return of expanding backlogs has been deferred until trade issues and other geopolitical tensions recede,” says Fiore.
Customer inventory levels rose 1.5 points in March to 46.8 after having fallen 1.4 points in February. “Customers’ inventory levels in March continued to contract, but moved closer to ‘about right’ territory. Panelists are reporting that the amounts of their companies’ products in their customers’ inventories suggest a demand level that remains positive for future production,” says Fiore.
With a big decline in the orders index and little change in customer inventories the ratio of orders to inventories fell 0.1 in March to 1.0 after having declined 0.1 in February. The 1.0 level for this index suggests that production should be relatively steady in the months ahead.
The prices paid component climbed 7.0 points in March to 69.4 after jumping 7.5 points in February to 62.4 after having risen 2.4 points in January and 2.2 points in December. Fiore noted that, “The Prices Index indicated increasing prices in March for the sixth consecutive month, driven by dramatic increases in steel and aluminum prices as a result of recently deployed tariffs. Corrugate, copper and plastic resins have all experienced price growth as companies move to minimize their exposure to foreign-made goods, causing domestic prices to rise amid new demand. Forty-six percent of companies reported higher prices in March, compared to 31 percent in February. This share has consistently increased over the past five months, from a low of 12.2 percent in November,” says Fiore.
We expect GDP to expand at a 1.5% pace in the first quarter and climb 2.5% in 2025. The economy is showing numerous signs of uncertainty and rising prices but, thus far, few signs of slowing down.
Stephen Slifer
NumberNomics
Charleston, S.C.
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