NAPM Rises in March; New Orders and Employment Bounce Back

The National Association of Purchasing Management's purchasing managers' index, a key measure of manufacturing sentiment around the country, rose to 43.1 in March from 41.9 in February, indicating that purchasing executives believe economic conditions have improved slightly.

The report, a survey of more than 350 companies in the United States, shows an improvement in new orders and employment in March, but the index shows employers are still worried about demand.

This figure has declined steadily in the past several months, and for the past eight months has been below 50, indicative of contraction in the manufacturing sector of the economy. A reading below 42.7 is generally consistent with recession in the entire economy. It bounced above that level in this most recent report after two straight readings below that figure. Since hitting 41.2 in January, this figure has rebounded in the past two months. Stocks reacted positively to the report, as it's an indication that perhaps the economy will be able to skirt a recession if demand improves.

The regional manufacturing indices and various other anecdotal indicators of business confidence show a remarkable divergence from various reports on consumer sentiment. Consumers remain more positive, owing to a low unemployment rate and the overall growth of their net worth over the last several years, especially in home equity. Lack of demand and investment, the fall in the stock market, as well as more stringent borrowing costs, have led businesses to be more pessimistic than consumers.

Since the recent slowing in economic growth seems to be led by the business sector, economists are concerned that this slowing isn't just a cyclical one, but a structural one, caused by overinvestment and overcapacity at a lot of corporations; that is, companies overinvested in production capability for an unrealistic amount of demand. If that's the case, the slowdown could be worse and more prolonged. But if the NAPM release is any indication, there's the potential chance that consumer spending, should it remain buoyant, will help pull the manufacturing sector out of its current malaise.

It's generally thought that a round of horrid-looking data will move the Federal Reserve to cut short-term interest rates prior to its upcoming May 15 meeting. These data do not support that idea, although another intermeeting cut remains a possibility.