Although factory activity in the United States shrank last month, the rapid decline in manufacturing appears to have moderated somewhat. Some signs of encouragement can be found in new orders for U.S.-made goods.

Factory activity in the United States shrank in March, though at a slower pace than the previous month, according to an industry report released on Wednesday.

In its latest Report on Business, the Institute for Supply Management (ISM) said its PMI index of national factory activity rose to 36.3 in March from 35.8 in February. A reading below 50 indicates contraction in the sector. ISM said the index has been below this level for 14 straight months.

“The numbers were on the positive side for the economy,” Cary Leahey, a senior managing director at consultancy Decision Economics in New York, commented to Reuters.

“The big one is the ISM manufacturing index, which was flat and the market is not going to get too excited about that, but the good news is that it does appear to be stabilizing over the last three months,” Leahey continued. “So that is another sense that maybe the economy is at long last trying to make a bottom.”

ISM reports that its production index, which registered at 36.3 percent in February, rose 0.1 percentage point higher in March (36.4 percent). This is the seventh consecutive month of decline in production. Paper products and miscellaneous manufacturing were the only two industries reporting growth in the latest readings.

“The rapid decline in manufacturing appears to have moderated somewhat, as the PMI remains in the mid-30s for a third consecutive month,” Norbert Ore, chair of the ISM Manufacturing Business Survey Committee, said in an announcement of the findings. “While the PMI is slightly higher in March, the new orders index offers greater encouragement, as it rose above the 40 percent mark for the first time in seven months.”

New Orders
The new orders component of ISM’s data rose to 41.2 in March, 8.1 percentage points higher than the 33.1 percent registered in February. This is the 16th consecutive month of contraction in new orders. Six industries reported growth in new orders last month: plastics and rubber products; nonmetallic mineral products; furniture and related products; food, beverage and tobacco products; computer and electronic products; and miscellaneous manufacturing.

According to new government data, new orders for manufactured goods increased 1.8 percent ($6.1 billion) to $352.2 billion in February, up following six consecutive monthly decreases. Excluding transportation, new orders increased 1.6 percent, the U.S. Census Bureau reports today. New orders for manufactured durable goods increased 3.5 percent ($5.6 billion) in February, revised from the previously published 3.4 percent increase. This followed a 7.8 percent January decrease. New orders for manufactured non-durable goods increased 0.3 percent ($0.5 billion).

Shipments and Unfulfilled Orders
Shipments, down seven consecutive months and following a 2.6 percent January decrease, dropped 0.1 percent ($0.4 billion) to $365.9 billion in February. This was the longest streak of consecutive monthly decreases since the series was first recorded in 1992.

Shipments of manufactured durable goods in February decreased 0.5 percent ($0.9 billion) to $178.5 billion, unchanged from the U.S. Census Bureau’s previously reported decrease. Shipments of manufactured non-durable goods increased 0.3 percent ($0.5 billion) to $187.4 billion, following 0.5 percent January increase.

Unfilled orders for manufactured durable goods the previous month decreased 1.4 percent ($10.7 billion) to $773.2 billion, revised from the Commerce Department’s previously published 1.3 percent decrease. This followed a 2 percent January decrease.

ISM reports two industries whose order backlogs increased in March: nonmetallic mineral products; and food, beverage and tobacco products. Based on responses from purchasing and supply executives nationwide, ISM’s index of order backlogs registered 35.5 percent in March, 4.5 percentage points higher than the 31 percent reported in February. Of the 83 percent of respondents who reported their backlog of orders, 11 percent reported greater backlogs, 40 percent reported smaller backlogs, and 49 percent reported no change from February.

Inventories
Manufacturers’ inventories contracted in March as ISM’s inventories index registered 32.2 percent, a 4.8 percent drop from February’s 37 percent reading. Apparel, leather and allied products is the only industry reporting higher inventories in March.

In February, inventories of manufactured durable goods decreased 1.1 percent ($3.6 billion) to $336.1 billion, revised from the previously published 0.9 percent decrease, according to the U.S. Census Bureau. This followed a 1.1 percent January decrease.

Inventories of manufactured non-durable goods decreased 1.3 percent ($2.6 billion) to $193.5 billion. This followed a 1.2 percent January decrease. Petroleum and coal led the decrease, down 3.9 percent ($1 billion) to $23.7 billion. This also was the sixth consecutive monthly decrease.

“Most of the international markets have been reducing inventory levels and they are forecasting improvements in the next four to six months,” an executive in the chemical products industry told ISM.

Employment
ISM’s employment index registered 28.1 percent in March, which is 2 percentage points higher than the 26.1 percent reported in February. This is the eighth consecutive month of decline in employment. None of the 18 manufacturing industries reported growth in employment in March.

Data from the U.S. Department of Labor on Thursday showed the number of new jobless claims in the U.S. rose last week to a 26-year high as employers slashed payrolls amid a recession. ADP Employer Services reports job losses were 742,000 in March compared to a revised 706,000 in February. ADP expects employment to remain weak for several months.

Economists are cautious about overreacting to any one month of data, especially numbers such as these that are highly volatile and subject to large revisions as more complete information becomes available.

Vassili Serebriakov, currency strategist at Wells Fargo in New York, commented on the slight improvement in the ISM index: “We’ve been off the lows for a few months, [but] I think it’s really too early to say whether this is a sustained improvement,” Reuters reports Serebriakov as having said. “The reading is still deeply in recessionary territory.”

Nonetheless, the latest data show some positive signs for the nation’s manufacturing economy.

Resources

March 2009 Manufacturing ISM Report on Business
Institute for Supply Management, April 1, 2009

Manufacturers’ Shipments, Inventories and Orders (M3)
U.S. Census Bureau, April 2, 2009

Instant View: U.S. March ISM Index Above Expectations
Reuters, April 1, 2009

Unemployment Insurance Weekly Claim Report (Week ending March 28)
U.S. Department of Labor, April 2, 2009

Challenger: Job Cuts Down 19.3% in March
by Tierney Plumb
Baltimore Business Journal / BizJournals.com, April 2, 2009

ADP Says U.S. Companies Reduced Payrolls by 742,000 (update 2)
by Bob Willis
Bloomberg News, April 1, 2009