ISM Manufacturing Index Unexpectedly Jumps Into Expansion Territory

A key bellwether for the U.S. economy improved by much more than expected in March, indicating that the economy is defying predictions of a slowdown and acting doubt on the idea current interest rates are a burden on the economy.

The Institute for Supply Management’s manufacturing index jumped to a reading of 50.3 percent in March. That’s up from 47.8 percent in February and a larger gain than the 48.1 percent expected by economists.

This is the first reading above 50, indicating an expansion in the manufacturing sector, after 16 months of contraction.

The manufacturing sector saw a boom during and immediately after the pandemic, as U.S. consumers directed purchasing power into household goods and appliances. The sector slumped as spending shifted toward services as the economy emerged from the pandemic and restrictions were lifted. Higher interest rates also may have weighed on purchases of big-ticket items.

The recovery of manufacturing may indicate that interest rates are not restricting economic activity as much as many economists and Fed officials expected. Fed chair Jerome Powell and other Fed officials have said they expect it will be appropriate to cut interest rates this year, although they are waiting for additional evidence that inflation is falling back down to two percent on a sustainable basis before they begin to cut.

A big part of the decline in inflation last year was due to a slowdown in inflation in goods, with many prices declining outright. In recent months, however, there have been signs that this disinflation has run its course and price levels may be on the rise again. In February, the consumer price index for core goods ticked up one-tenth of a percent compared with the previous month, bringing the 12-month change to a decline of 0.3 percent.

That could upend plans for rate cuts, especially if services prices continue to rise rapidly. The prices of core services climbed 0.5 percent for the month and were up 5.2 percent compared with 12 months earlier.

The barometer of prices in the Institute for Supply Management’s survey registered 55.8 percent, up 3.3 percentage points compared to the reading of 52.5 percent in February.