Although manufacturing is of diminishing importance to the economy, (it was in deep contraction both in 2015-16 and again in 2022 without any recession), the ISM manufacturing index remains an important indicator with a 75+ year history of accurately describing that sector and forecasting it over the short term. 

Any number below 50 indicates contraction. The ISM indicates that the number must be 42.5 or less to signal recession. I use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively, for forecasting purposes.

During the winter months, as most businesses likely figured that the new Administration would be laying more tariffs, there was a rush to get their new orders in asap. That has emphatically ended. 

In this morning’s report for April, the headline number declined -0.3 to 48.7, the second month of contraction, while new orders rose +2.0 to 47.2, indicating slower contraction.

Here is a look at both the total index (blue) and new orders subindex (gray) for the past ten years:

(Click on image to enlarge)

Note that both have been lower in 2022-23 and also the headline was lower in 2016, both times without signaling recession, because services remained in firm expansion. Including this month, here are the last six months of both the headline (left column) and new orders (right) numbers:

NOV  48.4. 50.4

DEC 49.2. 52.1

JAN 50.9  55.1

FEB  50.3  48.6

MAR 49.0. 45.2

API 48.7. 47.2

The current three month average for the total index is 49.3, and for the new orders subindex 47.0. 

For the economy as a whole, the weighted index of manufacturing (25%) and non-manufacturing (75%) indexes is more important. The average of the last two months for the headline and new orders numbers in the non-manufacturing report is 52.2 and 51.3, respectively. To signal economic contraction, this month’s numbers in the non-manufacturing report must be 50.2 and 50.9, respectively. While the headline number may not decline that much, there is a very good chance that the new orders number will decline enough for a red flag.

In summary, as of now the combined indexes suggest an economy that is growing by the barest of margins. We will find out if that changes when the non-manufacturing report for April is released on Monday.

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