U.S. factory gauge rises from two-year low on employment gains

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(April 1): A gauge of U.S. factories topped estimates in March, rising from a two-year low on strength in employment and orders and signaling stabilization after a rocky few months.

The Institute for Supply Management index rose to 55.3 from 54.2 as three of five main components increased. The result topped estimates in a Bloomberg survey calling for a rise to 54.5 and remained above the 50 level that indicates expansion. Measures of deliveries and inventories decreased.

Key Insights

The reassuring reading may signal the worst is over after months of mounting pressure in manufacturing sent the gauge tumbling from a 14-year high in August. 

The bounce brought the factory gauge back up toward its 12-month average. 

The biggest contributor to the better March reading came from employment, which snapped a three-month slide with the biggest gain in three years. 

That's a sign of labour-market resilience before Friday's March jobs report, which is forecast to show hiring rebounded from a weak February. 

While the Federal Reserve has pledged patience on interest rates, factories still face hurdles as the economy cools and the global outlook dims. 

Figures released last week showed fourth-quarter growth cooled more than initially reported, and economists project the first-quarter expansion pace slowed to 1.5%, the weakest in three years. 

Readings for export orders and imports both fell to fresh two-year lows, the latest evidence that the extended trade war with China is taking more of a toll on economic growth. 

A separate report Monday showed retail sales unexpectedly eased in February on declines in grocery stores and building materials, which may signal further headwinds for the economy in the first quarter.

An index of prices paid rebounded from a three-year low and climbed back above 50, a signal costs are ticking up again as crude oil prices extend their rally from December lows. An index of supplier deliveries fell to a two-year low of 54.2. Readings below 50 indicate faster deliveries, while those above 50 signal they are slowing. 

The customer inventories index rebounded from an eight-year low to 42.7, remaining at a level that indicates future potential for production growth. The order backlogs gauge fell to just above the 50 level. The main ISM manufacturing gauge has held above the 50 line that divides expansion and contraction since August 2016.