The ISM manufacturing index weakened unexpectedly in March as orders and production slowed sharply. Surging energy costs may have played a part, while ongoing struggles with supply chains and labor shortages may also be contributing. Construction is holding up better, but there is increasing caution on the outlook for residential property.
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Where China Goes, US Manufacturing Follows
The ISM manufacturing index fell a fair bit further than expected in March to stand at 57.1 versus 58.6 in February. The consensus forecast was 59.0. Regional surveys had indeed pointed to a stronger outcome, but you do occasionally get a bit of divergence. Instead, it is more in line with the declines seen in the Chinese PMI, and this suggests supply chain strains may be holding back the growth story.
The recent COVID-19 containment measures in China mean that supplies of components will remain constricted for the next few months given the lags involved due to shipping, which will further constrain output.
Chinese PMI Leads the US ISM By Around Three Months
Macrobond, ING
New orders were particularly soft, falling to 53.8 from 61.7 while output dropped to 54.5 from 58.5 – both are the lowest readings since May 2020. Inflation pressures continue to build, as prices paid surged to 87.1 from 75.6 on the back of massive increases in energy costs.
It may well be that the higher input costs led to customers placing fewer orders and/or businesses holding back in the hope that the energy price shock may settle down. We'll have to wait and see.
Other components highlighted the ongoing supply chain/labor shortage issues with the backlog of orders, while dropping from 65 to 60, still remaining at strained levels. Supplier delivery times are not increasing quite so rapidly, but they are still lengthening.
While the customer inventories component improved, they are still way below where they would normally be expected to be. Overall, the growth story is still pretty robust, but those inflation pressures are only getting worse.
Construction Still Led By Residential, But Clouds are Forming
Separately, construction spending rose 0.5% month-over-month, below the 1% consensus, but there was an upward revision to January's figure to 1.6% month-over-month from 1.3%. Residential construction rose 1.1%, with non-residential contracting 0.1%. Within that, government construction spending fell 0.4%.
Construction Spending Levels by Sector
Macrobond, ING
Overall, this isn’t a bad outcome, but the report does hint again that housing supply is increasing at a time when demand is looking susceptible to weak consumer confidence. This is also amid a lack of affordability due to record price increases, which is compounded by surging mortgage rates that could soon rise above 5%.
A housing slowdown is a key vulnerability for the US economy in 2023 given our predictions of aggressive Federal Reserve policy tightening that will likely get the Fed funds rate up to 3% around the turn of the year.
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