US manufacturing activity was in contraction territory for the fifth straight month in March on sluggish new orders as firms are uncertain about the timing of a pickup in demand while supply deliveries were faster and prices were stabilizing, data from the Institute for Supply Management released Monday showed.

The ISM survey also indicated equal levels of activity toward expanding and contracting head counts amid mixed sentiment about the return of growth early in the second half of the year.

The sector index compiled by the ISM, which shows general direction, fell 1.4 percentage points to 46.3 after edging up to 47.7 in February from 47.4 in January for its first rise in six months. The latest figure is below the median economist forecast of 47.5.

Regarding the overall economy, this figure indicates a fourth month of contraction after a 30-month period of expansion. The ISM's manufacturing PMI reading above 48.7, over time, generally indicates an expansion of the overall economy.

The index has been on a gradual downtrend since June 2022. It remains the lowest since May 2020, when the index at 43.5 was recovering from a recent low of 41.8 the previous month during the first wave of the pandemic. The all-time low is 29.4 hit in May 1980.

The Econoday Consensus Divergence Index stood at minus 28, below zero, which indicates the US economy is performing worse than expected. Excluding the impact of inflation, the index was at minus 28.

"With Business Survey Committee panelists reporting softening new order rates over the previous 10 months, the March composite index reading reflects companies continuing to slow outputs to better match demand for the first half of 2023 and prepare for growth in the late summer/early fall period," Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement.

"New order rates remain sluggish as panelists become more concerned about when manufacturing growth will resume," he said.

Last month, Fiore said the February index"reflects companies continuing to slow outputs to better match demand for the first half of 2023 and prepare for growth in the second half of the year."

Fiore told reporters that the timing of the pickup in demand appears to be delayed from earlier expectations of July to August.

"Companies appear to be much more willing to reduce their headcounts. The only reason they want to do that is they are not really sure about demands two to three to four to five months ahead," he said.

At the same time, Fiore downplayed the recent setback in the manufacturing index."We've only lost three or four points in the last five or six months," he said, referring to the index being stable at 50.0 in October and in expansion at 51.0 in September last year. The sector performance is pretty much the same whether it is assessed in seasonally adjusted or unadjusted measures, he said.

The index was in a range of 48 to 52 previously and is now in a range of 46 to 49, and will be probably so in the April-June quarter, Fiore said.

On the outlook for a pickup in the second half of 2023 anticipated by manufacturers late last year, he said,"Q1 hasn't been bad. We will see what Q2 brings."

"The probability of July and August being strong months is probably being pushed out," he predicted."They (companies) were more looking at Q4 increased activity levels."

Fiore also told reporters that there are no signs of tighter lending in the March survey amid bank failures, although he added that capital investment plans appear to be delayed.

Of the five subindexes that directly factor into the manufacturing PMI, none were in growth territory.

The new orders Index contracted for the seventh consecutive month, falling 2.7 points to 44.3 in March after rebounding 4.5 points 47.0 in February.

The production index reading of 47.8 is a 0.5-point increase compared to February's figure of 47.3.

"Orders and production are fairly flat month over month," a firm in the computer and electronic products category told the ISM."Lead times have stabilized in most areas, so looking at reducing commitments on new orders, except for a few strategic electronic buys with lead times that are still too long."

Fabricated metal producer said its overall first quarter sales are better than planned but that sales volume is pulling down its automotive original equipment manufacturer (OEM) side, which is the majority of its business."We believe the second quarter will be hard but are holding to our outlook," the firm said.

The employment index registered 46.9 in March, 2.2 points lower than the February reading of 49.1, indicating employment contracted again, continuing a trend of weak performance since September 2022.

The delivery performance of suppliers to manufacturing organizations was faster for a sixth straight month in March. The supplier deliveries index registered 44.8, down 0.4 point from 45.2 in February. This month's reading indicates the fastest supplier delivery performance since March 2009, when the index registered 43.2.

The inventories index registered 47.5 in March, 2.6 points lower than the 50.1 reported for February.

The ISM manufacturing index has been in sub-50 contraction the last four months. March's consensus is 47.5 versus February's 47.7.

The manufacturing composite index from the Institute for Supply Management is a diffusion index calculated from five of the eleven sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms nationwide. The survey queries purchasing managers about the general direction (tracked in volumes) of production, new orders, order backlogs, their own inventories, customer inventories, employment, supplier deliveries, exports, and imports. Data on changes in input prices (prices paid) are also tracked. The five components of the composite index are new orders, production, employment, supplier deliveries, and inventories (their own, not customer inventories). The five components are equally weighted. The questions are qualitative rather than quantitative; that is, they ask about the general direction rather than the specific level of activity. Each question is adjusted into a diffusion index which is calculated by adding the percentage of positive responses to one-half of the unchanged responses.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM manufacturing index, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.

The ISM manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. More than one of the ISM sub-indexes provide insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on this report which helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report.

Importance
The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is enhanced by the fact that it is available very early in the month and is not subject to revision.

Interpretation
The bond market will rally (fall) when the ISM manufacturing index is weaker (stronger) than expected. Equity markets prefer lower interest rates and could rally with the bond market. However, a healthy manufacturing sector, indicated by rising ISM index levels, bodes well for corporate earnings and is bullish for the stock market.

The level of the ISM manufacturing index indicates whether manufacturing and the overall economy are growing or declining. Historically, readings of 50 percent or above are associated with an expanding manufacturing sector and healthy GDP growth overall. Readings below 50 indicate a contracting manufacturing sector but overall GDP growth is still positive until the ISM index falls below 42.5 (based on statistics through January 2011). Readings in between these two levels suggest that manufacturing is declining while GDP is still growing but only very slowly.

In addition to the ISM manufacturing composite index, the various sub-components contain useful information about manufacturing activity. The production component is related to industrial production, new orders to durable goods orders, employment to factory payrolls, prices to producer prices, export orders to merchandise trade exports and import orders to merchandise imports.

Vendor (supplier) deliveries are an important component of report. The more slowly orders are filled and delivered, the stronger the economic growth and the greater the potential for inflation. When orders are filled quickly, it means that producers don't have as many to fill.

The ISM manufacturing composite index and its sub-components can be subject to some monthly volatility, making the three-month average of the monthly levels more indicative of the trend.