Soft ISM Print Reflects a Confluence of Factors

West coast port shutdowns, a strong U.S. dollar, lingering effects of a wild winter and both the ups and downs of low oil prices took their toll on the manufacturing sector in March, as the ISM survey fell to 51.5.

Business is “Extremely Strong” & “Really Starting to Slow Down”

Charles Dickens could not have said it better. With so many special factors influencing the cold hard data, we find the excerpt quotes from various industry sectors offer anecdotal detail that can offer additional perspective. The rosy assessment in the headline above came from the transportation equipment sector, and the more concerned take was from computer and electronics products. Other excerpts focus on supply chain disruptions attributable to weather or west coast port shutdowns.

Consistent with our narrative of the mixed effects of low oil prices, we see comments from food beverage and tobacco products industries that are positive: “Falling [energy prices] have helped on the cost side while sales are getting a boost through improvements in consumer disposable income.” Meanwhile the petroleum and coal products sector finds that “oil prices [are] impacting drilling and project activity. [We are] pursuing cost reductions from suppliers for a wide variety of goods and services.”

But What Do the Numbers Say?

Setting aside the special factors, the numbers, on balance, suggest a weakening in the factory sector. Some of the special factors are temporary, as the worst of the winter storms are in the rear-view mirror and the effect of supply chain disruptions attributable to weather and the port situation should fade in coming months. The strong dollar and low oil price environment are likely going to persist. The new orders measure fell to 51.8 and supplier deliveries slowed to 50.5. Inventories fell to 51.5 and customer inventories fell to 45.5. Perhaps the most impactful piece of information for Fed policy is that the employment component is at stall speed: 50.0.

Not Just the ISM, Business Activity is Slowing

In separate economic releases, we have learned that business activity in March has been mixed. The Dallas Federal Reserve’s manufacturing index slipped further into contraction territory, as Texas endeavors to reassess the business environment after the steep drop in oil prices. A similar index from the Kansas City Federal Reserve came in at -4, a move that puts that measure deeper into contraction than it has been in a year and a half. But the weakness was not limited to oil regions. Yesterday, we also learned that the Chicago Business Barometer registered its second straight month below 50.

Similar surveys for other areas like New York, Milwaukee and Philadelphia managed to stay above breakeven, but two out of those three lost ground in March. No matter how you parse the survey data, activity in the manufacturing sector is softening. Whether that is due to stormy weather and supply chain disruptions or a fundamental outlook in capital spending plans is unclear at this point.