US ISM Manufacturing: Orders and employment at their lowest level since 2009 tell the real story – Wells Fargo

Data released on Wednesday, showed the US Manufacturing ISM Index dropped modestly to 49.1, against expectations of a more significant decline. According to analysts at Wells Fargo, it has a lot to do with supplier deliveries shooting higher amid widespread supply chain disruption. They argue orders and employment tell the real story, with both indicators at their lowest since 2009.

Key Quotes: 

“The ISM is a time-tested bellwether for the manufacturing sector and due to its long history, it is a favorite input for econometric models. In the month of March it came in at 49.1, a level that might ordinarily suggest only modest contraction. This measure surveys purchasing managers in the factory to put a finger on the pulse of a number of key metrics like deliveries, orders, employment and inventories.”

“In March, supplier deliveries shot up to 65.0. Among the different components of the ISM, supplier deliveries is the only one that is an inverse indicator. The idea here is that deliveries slow down as the economy improves. More plainly: it’s tough to get the stuff you need to run your factory when the economy is really humming. But that’s not what is happening here; the slow supplier deliveries are occurring amid a drop off in arrivals at the nation’s top trading ports and is instead a reflection of supplychain constraints. Since this component makes up a fifth of the calculation for the headline ISM, it essentially acted as a life preserver to an indicator that otherwise would have been sinking much faster.”

“Today’s news comes on the heels of a Presidential address last night that warned of the devastating human cost of COVID-19. But those same dire projections also show the case counts coming down sharply in the spring months which would be consistent with our forecast of growth returning by the end of the year and manufacturing picking back up early next year.”