ISM PMI up in March, above expectations; US manufacturing sector expanding for first time since September 2022; US Treasury yields rise significantly; expectations of Fed rate cuts soften; ANZ: jump came despite broad-based weakness in Fed manufacturing surveys, small fall in S&P US Manufacturing PMI, ISM: reading corresponds to 2.2% US GDP growth annualised.
The Institute of Supply Management (ISM) manufacturing Purchasing Managers Index (PMI) reached a cyclical peak in September 2017. It then started a downtrend which ended in March 2020 with a contraction in US manufacturing which lasted until June 2020. Subsequent month’s readings implied growth had resumed, with the index becoming stronger through to March 2021. Readings then declined fairly steadily until mid-2023.
According to the ISM’s March survey, its PMI recorded a reading of 50.3%, above the generally expected figure of 48.5% as well as February’s reading of 47.8%. The average reading since 1948 is roughly 53.0% and any reading below 50% implies a contraction in the US manufacturing sector relative to the previous month.
“The US manufacturing sector moved into expansion for the first time since September 2022,” said Timothy Fiore of the ISM Manufacturing Business Survey Committee. “Demand was positive, output strengthened and inputs remained accommodative.”
US Treasury yields rose significantly on the day. By the close of business, the 2-year Treasury bond yield had added 8bps to 4.71%, the 10-year yield had gained 10bps to 4.31% while the 30-year yield finished 11bps higher at 4.46%.
In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened, although several cuts are still factored in. At the close of business, contracts implied the effective federal funds rate would average 5.315% in May, 1bp below the current spot rate, 5.235% in June and 5.18% in July. March 2025 contracts implied 4.505%, 82bps less than the current rate.
“The jump came despite broad-based weakness in the Fed manufacturing surveys over the month and a small fall in the S&P Global US Manufacturing PMI,” observed ANZ FX analyst Felix Ryan. “The outlook remains challenging, given high inventories and weak external demand, but the 6.2 point leap in the production index to its highest in almost two years was striking.”
Purchasing managers’ indices (PMIs) are economic indicators derived from monthly surveys of executives in private-sector companies. They are diffusion indices, which means a reading of 50% represents no change from the previous period, while a reading under 50% implies respondents reported a deterioration on average. A reading “above 48.7%, over a period of time, generally indicates an expansion of the overall economy”, according to the ISM.
The ISM’s manufacturing PMI figures appear to lead US GDP by several months despite a considerable error in any given month. The chart below shows US GDP on a “year on year” basis (and not the BEA annualised basis) against US GDP implied by monthly PMI figures.
According to the ISM and its analysis of past relationships between the PMI and US GDP, March’s PMI corresponds to an annualised growth rate of 2.2%, or about 0.5% over a quarter. Regression analysis on a year-on-year basis suggests a 12-month GDP growth rate of 2.5% five months after this latest report.
The ISM index is one of two monthly US PMIs, the other being an index published by S&P Global. S&P Global produces a “flash” estimate in the last week of each month which comes out about a week before the ISM index is published. The S&P Global flash March manufacturing PMI registered 52.5%, up 0.3 percentage points from February’s final figure.