Manufacturing shrinks for 5th month in a row, ISM finds, with one gauge signaling recession

Numbers below 50% signal that the manufacturing sector is contracting. The last time the index fell five months in a row was in 2019, during a trade fight with China.

The ISM report is viewed as a window into the health of the economy, and it shows growing strains. New orders shrank to a level historically associated with recession, for example.

Economists polled by the Wall Street Journal had forecast the index at 47.3%.

Key details:

• The index of new orders dropped 2.7 points to 44.3%. “Sales a down a bit, and budgets being cut with a greater emphasis on savings,” an executive at a chemical company told ISM.

• The production barometer edged up 0.5 points to 47.8%.

• The employment gauge fell 2.2 points to 46.9%, marking the lowest level since early in the pandemic.

• The price index, a measure of inflation, declined 2.1 points to 49.2%. Inflation is still a big worry, but price increases have slowed sharply since last summer.

Big picture: Manufacturers have battled supply shortages, high inflation and rising interest rates over the past year.

While the shortages are clearing up and inflation is slowing, interest rates are still rising, boosting the odds of recession both in the U.S. and abroad.

The result: The near-term outlook for manufacturers is still quite cloudy. More companies are tackling the problem with hiring freezes or even layoffs.

“Now companies are facing the reality that demand is not going to come back to support the current level of employment,” said Timothy Fiore, chair of the ISM survey.

Looking ahead: “The new orders index is very much in recessionary territory, with only one previous occasion over the past 60 years where the index has fallen to that level without an economic contraction following,” noted deputy chief U.S. economist Andrew Hunter of Capital Economics.

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.61%
and S&P 500
SPX,
-0.05%
rose in Monday trades.