March Manufacturing Activity: On A High Plateau

April 3, 2006 – The ISM diffusion index of U.S. manufacturing activity fell by 1.5 index points to 55.2 in March, but continued to signal strong manufacturing growth (Chart 1). This index has fluctuated in a relatively narrow range of about 3 index points for the last seven months.

Chart 1. The ISM diffusion index of U.S. manufacturing activity. January 1987 through March 2006.

The input price index rose by 4 index points to 66.5 in March – still signaling unusually strong growth in manufacturers’ input costs (Chart 2). According to the ISM press release, “Prices are still a major concern, particularly in the energy and metals markets.”

Chart 2. The ISM diffusion index of manufacturing input prices. January 1987 through March 2006.

The employment index fell by 2.5 index points to 52.5 in March (Chart 3), but continued to signal a positive trend in the manufacturing payroll job count (coming Friday).

Chart 3. The ISM diffusion index of manufacturing employment and growth in manufacturing payrolls. January 2000 to date.

The FOMC has been worrying about the inflation risks posed by the combination of strong real economic growth and high/rising input costs. According to the ISM manufacturing survey, both of these conditions persisted in March.

Suzanne Rizzo

Sources:

Institute for Supply Management (http://www.ism.ws) - the ISM diffusion index of U.S. manufacturing activity (also known as the Purchasing Managers’ Index, or PMI) and related information.
U.S. Department of Labor, Bureau of Labor Statistics (http://www.bls.gov) - manufacturing payroll employment.
National Bureau of Economic Research (http://www.nber.org) - recession dates.