U.S. Manufacturing Shows Strong Growth in March

U.S. factories accelerated production in March, seeing the fastest growth in almost four years, despite rising input costs linked to ongoing conflicts. This surge has helped maintain the sector’s positive momentum.

The manufacturing PMI from the Institute for Supply Management rose to 52.7 in March, up from 52.4 in February. This marks three months of consecutive growth and the highest figure since 2022. Similarly, the S&P Global U.S. Manufacturing PMI increased to 52.3 from 51.6, continuing its growth streak for eight months. Both reports indicate that manufacturing activity is not just continuing, but picking up speed.

This growth is largely driven by demand within the country. S&P Global noted that the increase was mainly due to rising domestic demand, with both new orders and production levels on the rise. The ISM’s production index reached 55.1, expanding for the fifth month in a row. New orders also remained strong at 53.5, and the backlog of orders continued to grow. There has been an ongoing issue with customer inventory being “too low” for 18 months, suggesting manufacturers need to keep producing.

In March, 13 out of 16 sectors tracked by ISM reported growth, an increase from the previous month. Notably, the contraction in manufacturing’s share of GDP dropped from 21% to 16%. Among the six largest sectors, four experienced growth, including transportation equipment, computer and electronics, machinery, and chemical products.

The resilience of this growth is impressive, especially given the challenging cost environment. The ISM price index increased by 7.8 points to 78.3, the highest since June 2022, heavily influenced by the conflict in the Middle East, particularly the situation around the Strait of Hormuz. According to ISM panelists, around 40% flagged the conflict as a concern, while 20% mentioned tariffs. They also noted rising costs for raw materials, issues with transportation, and delays in containers, all of which are affecting global supply chains.

S&P Global’s analysis echoed similar findings regarding costs; input price inflation is at its highest since August, and supplier delivery times have worsened since October 2022.

Yet, there’s a sense of optimism among manufacturers and policymakers that these cost pressures will be short-lived. Chris Williamson, chief business economist at S&P Global Market Intelligence, remarked that the data reflects U.S. manufacturing’s ability to weather the storm of geopolitical tensions. He noted that business confidence suggests producers foresee only a brief and moderate effect from the ongoing conflict.

Federal Reserve Chairman Jerome Powell endorsed this view, stating that energy shocks tend to be fleeting. He indicated that the Fed would likely not tighten policies in response to rising costs stemming from these situations.

On the employment front, manufacturing is experiencing low growth, largely impacted by shifts in immigration policies. Economists at the Dallas Fed recently indicated that the current “break-even” employment growth rate needed to stabilize unemployment has turned negative. The ISM’s employment index fell to 48.7 for the 30th consecutive month, with 55% of respondents noting that they are still managing headcount closely. Likewise, S&P Global reported stable staffing levels, with some companies opting not to fill vacant positions. The Bureau of Labor Statistics is set to release its March employment report soon.