• The ISM Manufacturing PMI increased modestly to 47.1 in April 2023
• Pricing faced by manufacturers bounced with oil prices, up to 53.2 for April 2023
• Production and New Orders remained in contractionary territory in April 2023 at 48.9 and 45.7, respectively

The ISM (Institute for Supply Manufacturing) Manufacturing PMI (Purchasing Managers’ Index) report for April 2023 held its ground at an overall slightly contractionary pace. The April 2023 topline index came in at 47.1 for the month, which is up 0.8 index points from the March 2023 reading of 46.3. 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. Manufacturers’ hiring crept back above the breakeven threshold of 50 in the April reading (50.2), joining Prices (53.2) and Customer Inventories (51.3) as those categories experiencing slightly expansionary conditions. 

The New Orders component index of the ISM Manufacturing report increased to 45.7 in April 2023, up from a dismal 44.3 in March. Household consumption activity in the U.S. was strong in 2023Q1, according to the Bureau of Economic Analysis’ GDP report. Business investment, however, slowed posted one of the slowest quarterly growth paces in the post-pandemic period thus far in the same report. 

Manufacturers will be faced with the task of balancing production in response to ongoing consumer demand with a potential slowdown that many businesses and banks are already responding to – with the latter tightening lending conditions to both businesses and consumers since the start of this year. PNC still expects the U.S. economy to enter recession in the final months of 2023 on the back of slower consumer demand. With the Production component of the ISM Manufacturing report posting its fifth consecutive reading below the breakeven threshold of 50 in the April 2023 report (48.9), manufacturers appear to be leaning toward capitulation to the expected slowdown rather than attempting to ride the continuing wave of consumer spending. 

Manufacturers’ costs rose in April 2023 as reflected by a 53.2 reading for the Commodity Prices component index of the ISM Manufacturers’ PMI report. The oil price spike in early March, resulting from production cuts announced by OPEC, is now being seen by upstream producers. This cost pressure on producers will filter through to consumer inflation in the coming months as those producers’ 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 remain a dicey proposition as manufacturers manage their bottom lines. 

Another potential damper on the manufacturing sector looking ahead is the ISM Manufacturing report’s Customer Inventories reading of 51.3 for April 2023. The April result is the first reading above the breakeven threshold of 50 since June 2017 (50.5), with pre-pandemic conditions for this measure sitting in the low-40s range. Ample Customer Inventories suggests that New Orders will be tempered in the months to come, given that manufacturers’ customers have plenty of product on their shelves by their own assessment and may well be anticipating the consumer demand slowdown that is anticipated by those, including PNC, forecasting an approach toward recession through the coming months. 

With warmer weather on the way in the coming months, consumer spending will likely be geared toward services such as travel and local leisure & hospitality industry spending, undercutting manufacturers’ demand. And with slim prospects of a turn for the better in homebuying demand, given still-high prices and mortgage rates, manufacturers’ legs of support for the remainder of 2023 have been hollowed-out in almost every case. The Federal Reserve’s manufacturing-specific Industrial Production index has already posted declines in three out of the five months since its October 2022 high, corroborating concerns for the sector’s overall momentum and health.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance, and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.