The ISM Manufacturing PMI report for March 2023 dampened hopes that the sector was showing renewed life to kick of 2023. The March 2023 topline index came in at 46.3 for the month, declining to its lowest reading since emerging from the pandemic-induced collapse in early 2020 (41.7 & 43.1 in April & May 2020). The March report renews the manufacturing sector’s slide through the second half of 2022. This diffusion index indicates the net percentage of manufacturers who are experiencing expanding or contracting activity across various categories, with a reading below 50 revealing net contraction across the manufacturing sector. No components of the ISM Manufacturing PMI report crossed the expansionary threshold of 50 in March.

The New Orders component index of the ISM Manufacturing report decreased to 44.3 in March 2023, down from a bounce to 47.0 in February. The previous month’s increase in New Orders coincided with ongoing consumer demand strength and an increase in U.S. manufacturing-specific industrial production in both January and February to open 2023. But gains for the sector look to be in for near-term volatility rather than a renewed uptrend.

Manufacturers will be forced to contend with rising costs of their own in the coming months as oil prices are again on the rise thanks to a surprise cut in production announced by OPEC over the weekend. And PNC still expects the U.S. economy to enter recession in the final months of 2023 on the back of slowing consumer demand, so manufacturers will also be faced with a balance between meeting current demand and planning for such a slowdown as the year progresses. Indeed, the ISM Manufacturing report’s Production component index remained relatively steady in March 2023 (47.8 vs. 47.3 in February) but was nonetheless in contractionary territory for the month.

In another sign of manufacturers looking ahead to slower demand conditions as 2023 progresses, the ISM Manufacturing report’s Employment component fell sharply in March to 46.9 for the month, down from five months of stable conditions according to the diffusion index’s breakeven threshold of 50.0. The Employment component index had posted readings between 48 and 51 between October 2022 and February 2023.

But with New Orders now deteriorating and Production unable to regain expansionary conditions, the potential for sustained Manufacturing Employment gains from this point through the rest of this year looks minimal. Total manufacturing employment in the U.S. sits 1.3% above its pre-pandemic peak at just under 13 million workers nationally, suggesting that manufacturers are no longer suffering from the widespread labor shortages that plagued the sector – and much of the U.S. economy – over the past two years. Wage growth in Manufacturing will remain under upward pressure, however, as meeting current consumer demand will place a premium on retaining skilled workers.

Manufacturers’ costs, as measured by the ISM Manufacturers’ PMI report Commodity Prices component index, eased modestly in March 2023 – falling to 49.2 from 51.3 in February. The oil price spike resulting from OPEC’s production cuts announced over the weekend will push up production costs over the coming months, however, which will add to consumer inflation woes as those increased costs are passed on to retail shelves and services through mid-year. The Federal Reserve’s balancing act of taming inflation in the face of financial sector disruptions will receive no assistance from this next round of cost pressures facing manufacturers and the transportation of their goods to market.