March 2023 Report Shows Continued Manufacturing Backslide

After a brief plateau following a decline in the early part of the year, the Manufacturing PMI has resumed its backslide in March. According to the March 2023 Manufacturing ISM Report On Business, the PMI dropped more than a point last month, falling on the heels of widespread pullback across its aggregate metrics.

With figures nearing three-year lows and plenty of economic headwinds to suggest even more regression in the coming months, manufacturers are duly alarmed at the start of Q2.

Manufacturing indicators continue a downward slide

The manufacturing sector — and, consequently, the economy as a whole — is in contraction. The March 2023 ISM report’s struggling PMI remained below 50%, the benchmark for economic expansion/contraction, representing the fourth month of pullback. This comes after 30 months of expansion. Digging into the PMI reveals several concerning trends.

The New Orders index dropped 2.7 percentage points from the previous month, registering at 44.3%. It’s a sign companies are seeing reduced demand. New Export Orders remain below 50%, continuing their decline, as did the Backlog of Orders.

On top of softened demand, metrics for output and consumption are also on the decline. Both the Production and Employment indices were on the backslide, dragging down the overall PMI calculation by a combined 1.7 points.

Generally, the numbers reflect lower demand for goods. Together, the aggregate data points represent a three-year low for the manufacturing sector, casting a shadow over the economy.

Manufacturing hits a three-year low

With new orders plunging — and tighter credit conditions on the horizon — economists are worried a full-on recession is around the corner. Since all subcomponents of the Manufacturing PMI dropped below the 50% threshold for the first time since 2009, there is good reason for concern.

While some economists put their faith in the services sector to hold the United States back from a recession, it’s no secret the health of the manufacturing sector is intrinsically linked to the health of the overall economy.

The recent banking turmoil — and the tightened lending standards imposed as a result — could make it harder for smaller manufacturers to access credit. The Fed’s recent rate hikes to fight inflation have also made borrowing more costly. It all adds up to the potential for tighter conditions and even softer demand — possibly causing PMI numbers to slip further in the coming months.

Manufacturing faces multiple headwinds

Aside from softened demand and financial uncertainties, manufacturers are also facing employment uncertainty. March’s ISM report shows the Employment index slipping from 49.1% in February to 46.9% in March. This problem doesn’t show any signs of improvement. As supply starts to outweigh demand, shrinking backlogs mean there’s less available work.

In turn, manufacturers are bracing for lean times ahead by trimming their payrolls and lightening production schedules. Although it may not be a sign of a full-blown recession, it’s clear the manufacturing sector is finding its footing and balance, and the full impact on the greater economy is still uncertain.

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