In March, the ISM synthetic index for the manufacturing sector was lower than expected and lower than February’s number. The number was 51.3 versus 54.2 in February. Economic activity is still growing but at a slower pace.

For the first quarter the average number was 52.9 to be compared to 50.6 for the last 3 months of 2012. On average economic activity has been stronger at the beginning of 2013 but the rhythm was slightly lower at the end of it than at its beginning.

On the first chart we see that the index can hardly move away from its  historical average. Since 2011 the dynamic is not strong enough to let the economy converging to a stronger trajectory.  

In the short run, details of the ISM change focus on the New orders index and on the production index. Both dropped deeply in March. The New Orders index was at 51.4 in March versus 57.8 in February. Its negative contribution was -1.28 compared to a negative change of -2.9 for the ISM index. Production index was 52.2 versus 57.6 n February and its negative contribution was -1.08. These 2 indices explain 80 % of the ISM drop.

Inventories and Supplier Deliveries had also negative contributions by -0.4 each. Employment was the sole component with a positive contribution of 0.32.

New orders momentum is the main problématic change. On the third chart we see that the New Orders to Inventories lacks of momentum. It is not consistent with a period of strong and long growth. It does not show change in GDP profile when compared to previous months. Nevertheless backlog of orders are still growing (slowly in March) and will help to have good production dynamics in the short term.

The good news is the New Export Orders index. It’s growing rapidly and is consistent with real exports momentum. This could give an impulse to economic activity in the coming months.

The other good news is that there are pressures on prices. The Fed can continue its monetary strategy.

Conclusion

The US economy has almost stopped in March but there is no break. Economic activity is still growing but less rapidly that what was expected after the first two months of 2013. Internal demand seems to have been weaker than at the beginning of the year and that’s what we will have to llok at carefully. In the short run nonetheless exports could be stronger and take the relay of a weaker internal demand. This could be a catalyst for converging to a stronger trajectory.