US manufacturing sector weakest in nearly three years in March -ISM

WASHINGTON (Reuters) – U.S. manufacturing activity slumped to the lowest level in nearly three years in March as new orders continued to contract, and activity could decline further amid tightening credit conditions.

The Institute for Supply Management (ISM) said on Monday that its manufacturing PMI fell to 46.3 last month, the lowest reading since May 2020, from 47.7 in February. Economists polled by Reuters had forecast the index dipping to 47.5.

It was the fifth straight month that the PMI remained below the 50 threshold, which indicates contraction in manufacturing. But so-called hard data have suggested that manufacturing, which accounts for 11.3% of the economy, continues to grow moderately.

Manufacturing expanded at a 4.5% annualized rate in the fourth quarter, the government reported last week. Reports last month also showed orders for capital goods excluding aircraft eking out a small gain in February as did manufacturing output.

Rising borrowing costs as the Federal Reserve fights high inflation have cooled demand for goods, which are typically bought on credit. Demand could come under pressure following the recent failure of two regional banks, which stressed the financial sector.

Banks have tightened lending standards, which could make it harder for small businesses and households to access credit.

According to a Goldman Sachs analysis, manufacturing could be hit hard by a decline in bank credit as firms rely on bank lending for working capital or to finance capital expenditure. But it noted that manufacturing depending on bank credit also “tend to have larger firms that other things equal will have an easier time finding alternative sources of capital.”

The ISM survey‘s forward-looking new orders sub-index fell to 44.3 last month from 47.0 in February. Work backlogs continued to shrink, reflecting the collapse in demand as well as improved supply chains. The survey’s measure of supplier deliveries slipped to 44.8 from 45.2 in February. A reading below 50 indicates faster deliveries to factories.

With supply improving, inflation at the factory gate is retreating. The ISM surveys measure of prices paid by manufacturers dropped to 49.2 from 51.3 in February. The fight against inflation has, however, shifted to services.

The Fed last month raised its benchmark overnight interest rate by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs because of financial markets turmoil. The U.S. central bank has hiked its policy rate by 475 basis points since last March from the near-zero level to the current 4.75%-5.00% range.

Weak demand left factories with little incentive to increase employment. The surveys gauge of factory employment fell to 46.9 from 49.1 in February.

This measure has swung up and down, making it an unreliable predictor of manufacturing payrolls in the governments closely watched employment report. Factory payrolls fell in February after rising for nearly two years.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)