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On the radar: Four of five District Bank surveys of manufacturing point sharply lower in March, signal decline for ISM index

The four of the five District Bank surveys for the factory sectors reported starkly reduced activity overall. The exception was the Richmond Fed’s Composite Manufacturing Index which rose to a meager expansionary reading of 2 in March after -2 in February. The increase was mainly because of a rise in new orders to 0 (zero) after -10 in the prior month and a quick turnaround in shipments to 13 after 1 in the prior month. However, the component for employment fell to -7 in March after 8 in February which suggested that the mild increase was without anything to sustain it.

The Richmond index has the strongest correlation with the ISM number (0.848).  However, the other four point to a steep decline in activity that is the more probable path for the national number.  In particular, the Philadelphia index for general manufacturing business conditions (correlation 0.815) lost 49.4 points to -12.7 in March, its lowest reading since -12.7 in July 2012.

While no one District Bank survey is an infallibly good predictor of the ISM Manufacturing Index, an average of the five headline indexes evens out the picture with a very high correlation (0.950). The average for March was -21.5 after 12.9 in February. It points to the likelihood that the March ISM Manufacturing Index will see two months of narrow expansion in January and February wiped away by the impacts from the spread of the COVID-19 pandemic, and then some. The current median forecast for the March ISM Manufacturing Index in the Bloomberg survey sits at 45.0, a substantial decline from the 50.1 in February. I think that is a reasonable estimate, although I would allow for a downside surprise given the broad weakness in new orders.

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