April manufacturing output takes a step back after growing in March

Coming off of its first growth month in March, following a 16-month stretch of contraction going back to October 2022, manufacturing output in April reverted back to contraction, albeit slightly, according to the new edition of the Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).

The report’s benchmark metric, the PMI, came in at 49.2 (a reading of 50 or higher indicates growth), down 1.1% from March’s 50.3 reading. ISM added that the overall economy grew, at a slower rate, in April, for the 48^th consecutive month. The previous 16 months of contraction through February were preceded by a stretch of 28 consecutive months of growth.

The April PMI is 1.5% above the 12-month average of 47.7, with March’s 50.3 marking the high over that period and June 2023 marking the lowest, at 46.4.

ISM reported that nine manufacturing sectors saw growth in April, including: Nonmetallic Mineral Products; Printing & Related Support Activities; Primary Metals; Textile Mills; Electrical Equipment, Appliances & Components; Petroleum & Coal Products; Transportation Equipment; Chemical Products; and Plastics & Rubber Products. Sectors that saw contraction included: Miscellaneous Manufacturing; Machinery; Furniture & Related Products; Wood Products; Food, Beverage & Tobacco Products; Fabricated Metal Products; and Paper Products.

The report’s key metrics were mixed, including:

• New Orders, which are considered the engine that drives manufacturing, fell 2.3%, to 49.1, contracting after growing in March, remaining on an uneven path after a 24-month stretch of growth through May 2022, with eight sectors reporting growth;
• Production, at 51.3, fell 3.3%, growing, at a slower rate, for the second consecutive month, with eight sectors reporting growth;
• Employment, at 48.6, increased 1.2%, contracting, at a slower rate, for the seventh consecutive month;
• Supplier Deliveries, at 48.9 (a reading above 50 indicates contraction), were off 1.0% compared to March, growing faster, at a faster rate, for the second consecutive month, with four sectors reporting slower deliveries;
• Backlog of Orders, at 45.4, fell 0.9%, contracting, at a faster rate, for the 19^th consecutive month with three sectors reporting growth;
• Prices, at 60.9, rose 5.1%, increasing, at a faster rate, for the fourth consecutive month, with 13 sectors reporting growth;
• Inventories, at 48.2, were flat, contracting, at the same rate, for the 15^th consecutive month, with four sectors reporting higher inventories; and
• Customer Inventories, at 47.8, up 3.8%, heading too low, at a slower rate, for the 15^th consecutive month, with five sectors reporting customers’ inventories as too high

Comments submitted by the ISM member panelists again highlighted various themes related to the economy and market conditions.

“Conditions are improving as demand is starting to recover,” said a Chemical Products panelist. “Costs continue to be a major concern as suppliers that rapidly increased prices in the follow-up from COVID-19 are slow to return to pre-pandemic levels.”

And a Fabricated Metals panelist said that Business is slowing down and has been on a gradual decline for the last several months, with his company not seeing new orders at last year’s level, or at this year’s budgeted levels.

In an interview, Tim Fiore, Chair of the ISM's Manufacturing Business Survey Committee, explained that he anticipated the April PMI would end up between 49 and 52.

“I did not feel it was going to be a strong expansion at all, but we would continue to expand, meaning that all of the sub-indexes are heading in the right direction—not meaning that the PMI is going to stay above 50,” he said.

Looking at manufacturing outputs, which are measured by the Production and Employment indexes, he said there was sequential expansion but not at the same level it saw from February to March. The 2% expansion, he added was solid and represents a good surrogate for revenue. And he added that employment in April ended up at a 1.7:1 hire-to-fire ratio, its best number over the last seven months, with nearly two companies hiring for every one that is destocking.

Inputs, however, which are comprised of Supplier Deliveries, Inventories, Prices, and Imports, were labeled a “huge disappointment” by Fiore.

“I really expected suppliers to struggle to deliver a lot more than a 48.9 [reading],” he said. “I thought we would probably get to a 51 or 52 by now, with Inventories getting to 49.5. Those two numbers did not move in April, which is why I think it is more of a timing issue, and we may see that movement happen in May. Had we seen movement, the April PMI would have hit 50 or higher.

The theme for April manufacturing demand, which includes New Orders, New Export Orders, Backlog of Orders, and Customers’ Inventories, according to Fiore, was “confusing,” as there were strong indicators in March about improving demand, but those indicators washed out in April, with no clear indication as to why that was the case.

He noted that New Export Orders, which fell 2.9% to 48.7, fared fine in April, with Customers’ Inventories “just right,” and maybe even at the high side of too low, which Fiore said was not ideal, and New Orders still in a close range and consistent with February’s 49.2 reading. As for the further shrinking in Backlog of Orders, he noted that it was puzzling.

“If the backlog number had come in at 47 or 47.5, I would feel a lot better about all of this,” he said. “Our panelists are saying that their customers have enough of their inventory. The order rates are slowing compared to where they were in March, and our backlog is actually declining. That represents confusion and makes it hard to say exactly what is happening.”