The U.S. manufacturing sector continued to expand last month, albeit at a slower pace than in February due to weaker output and demand. However, the outlook remains strong heading into the spring.
Business activity in the U.S. manufacturing sector expanded in March, continuing the recent growth trend through the first quarter of 2013. However, the rate of expansion slackened modestly as several key indicators posted weaker performance.
According to the Institute for Supply Management's (ISM) latest manufacturing Report on Business, U.S. manufacturing expanded for the fourth consecutive month in March, while the overall U.S. economy grew for the 46th consecutive month.
The ISM purchasing managers index (PMI), a key monthly gauge of the factory sector, dropped to 51.3 last month, down from 54.2 in February and 53.1 in January. Readings above 50 indicate overall growth for the industry, meaning that manufacturing activity has continued to make gains, but at a decelerating pace from recent months. The latest PMI reading fell just below the 12-month average of 51.7.
"The manufacturing report showed housing- and auto-related industries outpaced other areas last month, a sign consumer spending is bolstering the expansion, while exports grew at the fastest pace in almost a year," Bloomberg News reports. "At the same time, a failure to reach compromise on ways to reduce the debt triggered $85 billion in across-the-board federal spending cuts on March 1, giving factories reason to take a guarded approach."
The decrease in the PMI came as a surprise to most experts. Economists surveyed by MarketWatch expected the March PMI to be relatively unchanged from February's reading, which was the highest in nearly two years.
Domestic demand grew at a dramatically slower pace in March, with the new orders index plunging to 51.4 from 57.8 in February and marking the lowest reading since December 2012.
Meanwhile, production fell to 52.2 from 57.6 in February, marking the seventh consecutive month of growth, and inventories inched down to 49.5 from 51.5, indicating a shift from growth to contraction.
On a more positive note, U.S. manufacturers made robust gains in trade last month, with the exports index climbing to 56 in March, up from 53.5 in February and marking the fourth straight month of improving international demand for U.S.-made products. However, it's unlikely that overseas demand offset declines in other key indicators.
"The ISM index for exports did pick up in March," Daniel J. Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), noted, "but it is hard to believe that net exports are driving manufacturing growth when Europe and Japan are in recession and China is just starting to accelerate after a growth slowdown last year."
The strongest gain in March was in the manufacturing labor market, with the employment index jumping to 54.2 from 52.6, the highest level in nine months and another sign that the factory sector is ready to hire.
Fourteen of the 18 U.S. industries tracked by the ISM posted growth last month: wood products; furniture and related products; plastics and rubber products; electrical equipment, appliances and components; fabricated metal products; paper products; apparel, leather and allied products; miscellaneous manufacturing; nonmetallic mineral products; computer and electronic products; transportation equipment; printing and related support activities; primary metals; and food, beverage and tobacco products.
Although most manufacturers polled by ISM remain optimistic about the future, looming policy changes and financial issues in the broader economy may soon become a drag on the sector.
"It is clear that manufacturing activity surged this winter, but now that spring has arrived, the reality that there are many headwinds this year is starting to constrain the pace of growth," Meckstroth added. "Consumers faced higher payroll taxes, gasoline prices rose, and wage and salary increases barely exceed the inflation rate. Firms could pick up the pace of investment spending but the budget battles in Washington, where austerity and sequestration are the main issues, have created enough uncertainty to keep a lid on new investments."