Apr 20, 2017

Business conditions continued to improve across the manufacturing sector in March, but the latest upturn was the weakest recorded for six months. The loss of momentum reflected softer rates of output and new order growth, alongside a slower rise in payroll numbers. Manufacturers sought to adjust their inventory strategies in response to more subdued sales growth, with stocks of finished goods reduced for the first time in six months. Meanwhile, higher raw material prices resulted in the strongest rate of cost inflation since September 2014. Factory gate charges also increased at the fastest pace for around two-and-a-half years. At 53.3 in March, down from 54.2 in February, the seasonally adjusted Markit final US Manufacturing Purchasing Managers’ Index (PMI) eased further from the 22-month peak recorded at the start of 2017 (55.0).

Latest rise in production is slowest for six months

The latest reading was the lowest since September 2016. March data pointed to a further moderation in output growth from the peak seen at the start of 2017. The latest rise in production was the slowest for six months, but still much stronger than the soft patch seen in mid-2016. Survey respondents noted that the improving domestic economic backdrop and rising spending from energy sector clients had helped to boost workloads in March. New orders expanded at the slowest pace since October 2016, thereby signalling a sustained loss of momentum from the peak seen at the start of the year.

Manufacturers cited greater caution among clients, alongside intense competition for new work and subdued export sales. March data pointed to only a marginal increase in new orders from abroad. Survey respondents commented on pressure from the strong dollar. In some cases, manufacturers attributed subdued export growth to a strategic focus on marketing and better sales opportunities in domestic markets. Mirroring the trend for production and new orders, latest data revealed a sustained slowdown in growth of input buying across the manufacturing sector. Some firms commented on tighter inventory policies, which contributed to a near-stagnation in stocks of purchases in March. At the same time, postproduction inventories dropped for the first time since last September. Meanwhile, suppliers’ delivery times lengthened to the greatest degree since February 2015, though weather-related transport disruptions exacerbated supplier delays.

Market Scenario

Inflationary pressures picked up again in March, with manufacturers reporting rising prices for a metals and chemicals in particular. Higher costs resulted in the strongest pace of output charge inflation since late-2014. Comment Commenting on the final PMI data, Chris Williamson, Chief Business Economist at IHS Markit said: “The post-election resurgence of the manufacturing sector seen late last year is showing signs of losing steam. Output growth slowed to a six-month low in March, optimism about the outlook has waned and hiring has slowed accordingly.

“While the survey data suggest that the goods producing sector enjoyed a relatively good first quarter on the whole, the loss of momentum seen in February and March bodes ill for the second quarter. “The survey data have acted as a reliable advance guide to official data in the past, and in March indicate a slowing of output growth to an annualised rate of around 2%. The survey’s employment index is meanwhile consistent with official manufacturing payroll numbers falling slightly. “If the activity numbers send a dovish signal to policymakers, the survey’s price indices favour the hawks. Inflationary pressures have risen to a two and a half year high, despite the oil price easing during the month.”

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