US: Manufacturing Activity Expands in March, But at a Marginally Slower Pace

US: Manufacturing Activity Expands in March, But at a Marginally Slower Pace

The Institute for Supply Management (ISM) index of manufacturing for March shed 1.5 points to 59.3, slightly worse than market expectations of a 0.8 point decline to 60. Despite the decline, the index remains in expansionary territory for the 19th consecutive month.

Most of the subindices recorded declines or no change in the month, with the exception of prices. The three largest declines (indicating decelerating growth) that drove the fall in the headline index occurred in the employment (-2.4 to 57.3), new order (-2.3 to 61.9), and inventories (-1.2 to 55.5) subindices.

Prices paid rose 3.9 points to 78.1, a new cycle high and the highest since April 2011 (82.6). Survey respondents reported rising commodity prices across industry sectors, but particularly in metals, corrugates, and parts made from plastics. Electronics manufacturers are also suffering from component shortages.

The spread between new orders and inventories – a good leading indicator of activity – narrowed to 6.4 (-1.1 points) in March. Overall this indicator remains consistent with manufacturing activity continuing to expand through the first half of 2018.

Of the 18 reporting manufacturing industries, 17 recorded growth in March. Apparel, leather and allied products was the sole industry reporting a decline in the month.

Key Implications

After a string of positive surprises, it was just a matter of time before the hot U.S. manufacturing sector would take a step back. The breadth of growth and building price pressures suggests that demand for U.S. manufactured goods remains robust. Comments by survey respondents were generally positive, but indicate shortages of components and labor are starting to have an impact by creating production and shipping delays.

Tariffs on steel and aluminum announced by the U.S. administration last month already appear to be driving up prices. Although many of the largest exporters of steel to the U.S. are exempt from tariffs at least until May 1st, survey respondents have reported ‘panic buying’ which is helping drive prices of steel and aluminum higher and resulting in some shortages. Moreover, the tariffs are creating uncertainty across supply chains, and if enacted are likely to take a bite out of affected industry margins enough to see prices rise for end users.

As in the U.S., growth in global manufacturing output has slowed in March. This could suggest that robust global economic momentum carried over from last year may be starting to wane. Moreover, tariffs announced by the U.S. administration on steel and aluminum, as well as tariffs against imports from China of aerospace, information and communication, and machinery could deal a blow to business confidence both domestically and abroad. Overall, higher prices and trade-related uncertainty could act to slow global demand for U.S. manufactured goods, and could partially offset the boost to U.S. economic growth expected from tax reform and fiscal stimulus.

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