The numbers: A key barometer of American factories was negative for the fourth month in a row at 47.7%, as manufacturers cut back on production to cope with a slower U.S. economy.

The change in the ISM index has been corrected.

The Institute for Supply Management’s manufacturing survey edged up from 47.4% in the prior month, but numbers below 50% signal the manufacturing sector is still contracting.

The ISM report is viewed as a window into the health of the economy. Economists polled by The Wall Street Journal had forecast the index to total 47.6%.

The last time the index was that low was in May 2020 during the early stages of the pandemic.

The silver lining? Manufacturers believe the economy might improve later in 2023.

“Companies continue to attempt to maintain head-count levels through the projected slow first half of the year in preparation for a stronger performance in the second half,” said Timothy Fiore, chairman of the ISM survey.

Key details:

  • The index of new orders rebounded 4.5 points to 47%. “While there are lingering concerns about a recession, we are not expecting a large drop-off in manufacturing this year,” a senior executive at a minerals company said. “Worst case is flat.”
  • The production barometer slipped 0.7 points to 47.3%.
  • The employment gauge fell 1.5 points to 49.1%.
  • The prices index, a measure of inflation, increased 6.8 points to 51.3%, but it’s far below year-ago levels in a sign of easing inflation and supply bottlenecks.

Big picture: Manufacturers have taken the most slings over the past six months as the economy has softened. Orders are down, production has slowed and businesses are hesitant to make costly commitments.

Yet manufacturers are no longer the driving force of the economy. The much larger service side — retail, restaurants, health care, travel — is still expanding and hiring and keeping the economy afloat.

The Federal Reserve continues to raise interest rates to tame high inflation, however, so the outlook for the economy is uncertain. Higher borrowing costs slow the economy and can even induce a recession.

Looking ahead: “The U.S. economy is trying to weather some ups and downs at the start of the year,” said senior economist Jennifer Lee of BMO Capital Markets. “Things are still not as weak as one would’ve imagined a year ago, but indicators are pointing to slower growth.”

Market reaction: The Dow Jones Industrial Average DJIA, +1.05%, and S&P 500 SPX, +0.76% fell in Wednesday trades.