NAPM index rises but stays below 50%

TEMPE, AZ — The National Association of Purchasing Managers' index rose for the second straight month in March. Yet because the index remained below 50 percent, the mark that indicates growth, no one in the manufacturing sector was ready to cry, "We are saved."

Certainly, no one at the association itself believes that manufacturing's soft period is ending. "The overall picture is one of continued decline in manufacturing activity in the month of March," said Norbert Ore, NAPM's chairman of the manufacturing business survey committee.

"The manufacturing sector is in its eighth month of decline and appears to lack drivers sufficient to stimulate recovery," Ore continued. He cited continued concern about both energy costs (still firm, if stable) and manufacturing employment (declining more slowly, but still falling).

An NAPM index of 50 percent or more indicates that the manufacturing sector is growing; a reading below 50 percent shows contraction in this area of the economy. March marked the eighth month in a row in which the index failed to reach 50 percent.

Still, Ore found some reason for hope from the March numbers. "It is encouraging that prices are moderating and there is growth in new export orders," he said.

Indeed, the price index finished just barely below 50 percent — indicating some softening in the prices manufacturers had to pay — for the first time in 22 months. The new export orders index registered 50.6 percent, the first time this figure topped 50 percent in five months.

Ore added, "Other bright spots were production and backlog of orders, which, though still declining, slowed significantly in their rate of decline." The production index hit 42.8 percent last month, up more than 300 basis points from the February tally; and the order backlog index was 43.5 percent, "evidencing a slower rate of decline in manufacturers' backlogs," said the association.

Speaking of the NAPM number from the point of view of interest rates, David Orr, chief economist at First Union Economics Group, commented that the report "confirms the (Federal Reserve's) current stance that while still weak, the factory sector is not getting weaker, and will be able to resume a growth trend by summer."

Orr pointed out that the new orders component also declined, "but at a lesser rate (42.3 percent in March, up from 40.8 percent the previous month)." He also said the positive behavior of the price index and a loosening in the supply pipeline "imply no inflation threat that would impede further Fed stimulus."

According to Anthony Karydakis, analyst with Banc One Capital Markets, "Putting the last three months together, it looks as if the pace of erosion in manufacturing activity is slowing somewhat, but let's not forget that these are still low readings overall."