US manufacturing activity slipped back into slight contraction in April after posting the first expansion in 17 months in March, hit by a"disappointing" decline in new orders and rising raw materials costs, but employment conditions continued improving, data from the Institute for Supply Management showed. The sector index compiled by the ISM, which shows general direction, fell 1.1 percentage points to 49.2 in April after rising 2.5 pints to 50.3 in March and falling 1.3 points to 47.8 in February. It was weaker than the median economist forecast of being neutral at 50.0.

"Demand remains at the early stages of recovery, with continuing signs of improving conditions," Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement."Production execution continued to expand in March, but at a slower rate of growth than in prior months. Suppliers continue to have capacity but work to improve lead times, due to their raw material supply chain disruptions." Panelists' comments in April indicated a slowing of staff-cutting efforts, he said. The approximately 1.7-to-1 ratio of hire versus reduction comments is the highest since September 2023, when it was 2-to-1, he added.

Fiore told reporters that the decline in new orders was"a bit disappointing" but it is not concerning, and that employment is still improving toward expansion. The overall index may show another slight contraction in May but new orders are unlikely to fall sharply, he predicted. Food and beverages are"the biggest disappointment" in April, he said, adding that the industry should be expanding ahead of the summer. Last month Fiore said new orders and production were unlikely to fall back into negative territory in coming months, and predicted that employment conditions should recover to expansion in May or June.

Among the five subindexes that directly factor into the manufacturing PMI, the new orders Index fell 2.3 percentage points to a four-month low of 49.1 in April after rebounding 2.2 points to 51.4 in March while the production index slumped 3.3 points to 51.3 after jumping 6.2 points to 54.6 in March. The employment index contracted for the seventh straight month but improved for the second straight month, rising 1.2 points to 48.6 in April. The manufacturing inventories index contracted for 15 months in a row; it was unchanged at 48.2 in April after climbing 2.9 points in March.

The delivery performance of suppliers to manufacturers was"faster" for the second straight month after one month of slowing preceded by 16 straight months in"faster" territory. The supplier deliveries index dipped 1.0 point to 48.9. This is the only ISM subindex that is inversed; a reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases.

Among other subindexes, the prices index indicated growth for the fourth month in a row, surging 5.1 points to 60.9 in April after rising 3.3 points to 55.8 in March, hitting the highest since 78.5 in June 2022.

The ISM manufacturing index ended a nearly year-and-a-half run of contraction in March, climbing 2.5 points to much better-than-expected 50.3. No further improvement is expected for April where the consensus is expected to come in a neutral 50.0 even.

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.