U.S. manufacturing activity. fell to the lowest level in nearly three years in March as new orders continued to contract, and activity could continue to decline amid tightening credit conditions.
The Purchasing Managers' Institute (PMI) published by ISM showed a fall to 46.3 last month, the lowest reading since May 2020, from 47.7 in February. Economists polled by Reuters had forecast the index falling to 47.5. This leads to indications of a contraction in the U.S. economy.
It was the fifth consecutive month that the PMI remained below the 50 threshold, which indicates a contraction in manufacturing. The manufacturing industry grew at an annual rate of 4.5% in the fourth quarter, based on last week's report. Last month's report also showed orders for capital goods excluding aircraft made a small gain in February as did manufacturing output.
The increase in borrowing costs by The Fed in order to combat high inflation has cooled the demand for goods has had an impact. Demand may come under pressure following the recent failure of two regional banks, stressing the financial sector.
Banks have tightened lending standards, which can make it harder for small businesses and households to access credit.
According to a Goldman Sachs analysis, the manufacturing sector could be hit hard by a decline in bank credit as firms rely on bank loans for working capital or to finance capital expenditure.
The forward-looking new orders sub-index of the ISM survey fell to 44.3 last month from 47.0 in February. A survey measure of supplier shipments slipped to 44.8 from 45.2 in February.
The Fed last month raised overnight interest rates by a quarter of a percentage point, but indicated it was on the verge of halting further increases in borrowing costs due to financial market turmoil. U.S. central bank has raised its policy rate by 475 basis points since last March from near zero to the current 4.75%-5.00% range.
Weak demand leaves factories with no incentive to add jobs. The survey for factory jobs fell to 46.9 from 49.1 in February.
