- by New Deal democrat
[Note: I’ll report separately on construction spending, also released this morning]
Although manufacturing is of diminishing importance to the economy, (it was in deep contraction both in 2015-16 and again in 2022 without any recession), the ISM manufacturing index remains an important indicator with a 75+ year history of accurately describing that sector and forecasting it over the short term.
Any number below 50 indicates contraction. The ISM indicates that the number must be 42.5 or less to signal recession. I use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively, for forecasting purposes.
In the last few months, as most businesses likely figured that the new Administration would be laying more tariffs, it appears there was a rush to get their new orders in asap. That was confirmed by this morning’s report for March, in which the headline index declined -1.3 to 49.0, the lowest since November, and new orders declined -3.4 to 45.2, the lowest level since last June.
Here is a look at both the total index and new orders subindex since the Great Recession:
Including this month, here are the last six months of both the headline (left column) and new orders (right) numbers:
OCT 46.5. 47.1
NOV 48.4. 50.4
DEC 49.2. 52.1
JAN 50.9 55.1
FEB 50.3 48.6
MAR 49.0. 45.2
The current three month average for the total index is 50.1, and for the new orders subindex 49.6. While the headline number is similar to those of last summer and autumn, as noted above the new orders component is the lowest since last June.
Last month I wrote that “The surge and then retreat in new orders in particular certainly looks like front-running potential tariffs.” This month’s further decline makes that look like almost a certainty. And the uncertainty about the level and extent of looming tariffs undoubtedly is also having an effect on new orders as well.
For the economy as a whole, the weighted index of manufacturing (25%) and non-manufacturing (75%) indexes is more important. Since In February the ISM services index came in at 53.5, and the more leading new orders subindex at 52.2, and the three month weighted average of each was 53.4 and 52.6 respectively, it would take a very steep decline in that index to signal recession now.
In summary, as of now the combined indexes continue to suggest that the economy is growing, albeit slowly. The non-manufacturing index for March will be reported on Thursday.