Lending markets

U.S. Purchasing Managers Indices Point to Economic Slowdown, Credit Markets Oppose It

  • Manufacturing PMI falls to 18-month low, new orders to 22-month low.
  • Manufacturing orders fall the most in a single month since April 2020.
  • Prices paid in manufacturing are the highest since June 2021, in services the price index is the second highest on record.
  • US Treasury yields soar on Fed comments suggesting rapid rate acceleration.

Economic turning points are often hard to see. The changes in the credit market are much more dramatic.

For example, March’s Purchasing Managers’ Indexes (PMIs) for the services sector and the surge in US Treasury yields on Tuesday.

The Institute for Supply Management’s (ISM) headline index rose to 58.3 from 56.5 in February, beating the consensus forecast of 58.0. It was the first gain in four months and the 22nd straight month of growth. Reading above 50 in the ISM indices signals expansion.

Service performance index


Excluding the February score, it was the lowest result in 13 months, since 55.9 last February, and reinforces November’s decline from 68.4. Which interpretation best represents the trend? The one-month gain or the four-month negative trend?

The new orders index, probably the most important measure for future business, fell from 56.1 to 60.0 in March, missing the 64.9 projection by a considerable margin. It was also the first increase in four months, a continuation of the decline from October’s score of 69.0 and the second lowest score in 13 months.

New orders


The prices paid index rose to 83.8 last month, higher than the forecast of 83.3 and the February result of 83.1. The March result missed being the highest on record by 0.1 points, December recorded 83.9.

Services employment was the only unambiguous improvement in March, rising from 48.5 to 54.0, well above expectations of 50.3. It was the best score since December 54.7.

In three of the four major service indices, the negative distribution looks clear despite modest month-on-month improvements. For employment, although this is the best result in three months, it is just slightly above the midpoint of the last 18 months. There was no hiring trend.

When the services sector indices are analyzed together with those of manufacturing, the worrying shift in the outlook becomes more evident.

The manufacturing PMI fell to 57.1 in March, missing the forecast of 59 and falling from 58.6 in February. It was the lowest level in 18 months and a continuation of the downward trend since the most recent high in October at 60.8.

Manufacturing PMI


New orders plunged to 53.8 in March from 61.7, a substantial disappointment from the forecast of 59.8. This crucial index hit a 22-month low, with the worst trade outlook since registering 32.2 in May 2020.

Manufacture of new orders


The prices paid index jumped to 87.1 last month from 75.6 in February. The consensus forecast was 80. This was the highest price inflation in nine months.

The jobs index rose from 52.9 to 56.3, for the best reading in a year and the second best in the pandemic era. The estimate was 53.7.

Inflation, consumption and economic growth

Perhaps the most logical way to interpret the ISM results in the context of current economic concerns and the historical role of manufacturing in economic direction.

Inflation and its impact on the American consumer is the main current economic concern. Will the record rise in the headline inflation rate and much larger increases in many basic necessities, including gasoline and energy, force a pullback in consumer spending? At 70% of US GDP, robust consumption is key to the recovery.

On this subject, the ISM indices are not ambiguous. Prices paid by manufacturing companies jumped sharply after falling at the end of last year. The gain in service pricing is less, but manufacturing costs have always been the leader in this area. If factory production costs rise, service sector spending will soon follow.

The new orders are the other revealer. The 7.9-point drop in the index is the biggest one-month drop since the pandemic shut down the economy in April 2020. If orders to manufacturers are falling, it’s likely because retailers are seeing less business.

Consumer spending was slightly weaker than expected in February at 0.3% versus 0.4%, with the control group’s GDP component down 1.2%. Personal consumption expenditure rose only 0.2%, less than half the forecast of 0.5%. Spending and spending both rose sharply in January, 4.9% and 6.4% respectively, so on a statistical basis, Q1 consumption is strong.

Economic growth has slowed considerably from the strong pace of 6.9% in the fourth quarter. The Atlanta Fed’s latest GDPNOw estimate for the first three months is 0.9%.

Alone, the results of the ISM are hardly conclusive. When combined with runaway inflation and a Federal Reserve that seems determined to make up for its recent policy mistakes by rapidly raising rates, the prognosis for the US economy becomes much more problematic.

Treasury yields and the Fed

The entire Treasury yield curve climbed after comments from two Federal Reserve officials made it clear they preferred higher rates and an aggressive reduction in the central bank’s balance sheet.

The 2-year Treasury yield added 15 basis points to Monday’s close at 2.578%.

2-year Treasury yield


The 10-year yield climbed 19 points to 2.603% and the 30-year yield rose 15 points to 2.621%.

10-year Treasury yield


Gov. Lael Brianard told a Minneapolis Fed webinar, “Getting inflation down is of paramount importance.” The Fed “will continue to methodically tighten monetary policy through a series of interest rate hikes and beginning to shrink the balance sheet at a rapid pace beginning at our May meeting.”

San Francisco Fed Chair Mary Daly, speaking to the Native American Finance Officers Association, said inflation, at its highest level in 40 years, “is as bad as having no money.” use”.

Ms. Brainard clarified her political preference. The $9 trillion balance sheet reduction ‘will contribute to monetary policy tightening beyond planned policy increases [fed funds] rate.”

The two women’s comments were more notable because they were considered among those in favor of less restrictive monetary policy and lower rates.

Yield spreads collapsed. The 2-10 yield spread was 2.5 points and the spread between the 2-year bond and the 30-year bond was 4 basis points.

Normally, a yield curve flattens when the economic outlook deteriorates and credit markets anticipate lower interest rates in the future. It is these more distant rates that are falling.

The surge in Treasury yields this year has an entirely different origin. Short-term rates rose as the Fed’s artificial policy restraint was lifted.

Does the almost inverted yield curve signal an economic slowdown? The ISM indices indicate a possibility but no more. For the opinion, the credit market forecast should be treated with caution.