US manufacturing grew for the first time in 1.5 years in March as production rebounded sharply and new orders increased, but employment at factories remained subdued amid “sizable layoff activity” and prices for inputs pushed higher.
The survey from the Institute for Supply Management (ISM) on Monday suggested the sector, which has been battered by higher interest rates, was on the mend, though risks remain from rising raw material prices. Timothy Fiore, who chairs the ISM’s manufacturing business survey committee, said “demand remains at the early stages of recovery, with clear signs of improving conditions”.
While the manufacturing rebound is a boost for the economy’s growth prospects, the rise in raw material prices suggested goods inflation could pick up in the months ahead. Goods deflation was the key driver of an inflation slowdown last year.
“If the contraction of manufacturing activity is over, far too soon to say, and price pressures are building in manufacturing, which appears to have been happening for the last three months, then this would have implications for the path for interest rates in 2024,” said Conrad DeQuadros, senior economic advisor at Brean Capital.
The ISM said its manufacturing PMI increased to 50.3 last month, the highest and first reading above 50 since September 2022, from 47.8 in February. The rebound ended 16 straight months of contraction in manufacturing, which accounts for 10.4% of the economy. That was the longest such stretch since the August 2000-January 2002 period.
A PMI reading above 50 indicates growth in the manufacturing sector. Government data recently showed manufacturing output rose at an annualized rate of 0.9% in the fourth quarter. It grew 1.6% in 2023 compared to 0.8% in 2022. Though consumer spending has shifted to services, demand for goods remains supported.
Nine industries, including textile mills, paper products, primary metals, chemical products and transportation equipment, reported growth last month. Electrical equipment, appliances and components, machinery and computer and electronic products were among the six industries reporting a contraction.
Commentary from businesses was fairly upbeat. Makers of chemical products reported that “performance continues to defy projections of a downturn in activity”, adding that “demand remains strong, and the pipeline for orders is robust”.
Transportation equipment manufacturers said they were “expecting to see orders and production pick up for the second quarter”. Makers of wood products reported that “business activity is up”, adding that “many manufacturers are anticipating better business in the second quarter”.
But manufacturers of machinery struck a cautious note, saying they were “noticing an increase in suppliers’ selectiveness regarding orders they quote and take”. Makers of paper products were worried about “energy pricing”. Computer and electronic products manufacturers said “demand remains soft, but optimism is high that orders are ‘just on the horizon’”.
