The U.S. Institute of Supply Management Index took another dive in March, and economists don’t see any improvement until the war is over.

The ISM report for March fell to a much weaker-than-expected 46.2. It was expected to hit 49. Nevertheless, the number came in below the 50 mark which indicates the line between expansion and contraction.

BMO Nesbitt Burns said that the report confirmed earlier signals today from the Euroland PMI and Japanese Tankan that March was a very weak month for the global factory sector.

Production and orders both plunged below 50. “It looks like it will take a while to bounce back. Inventories are being cut to the bone at both the customer level and for supplies/work-in-progress inventories. Prices are rising and delivery schedules are tight. This, while production is crushed is a highly unusual combination,” comments Nesbitt. “It is possible for an optimist to hang their hat on the low inventory numbers and the “deer in the headlights” effect the war created among business planners. The whole economy seems to be waiting to see what happens next in the war.”

RBC Financial points out that this is now the largest monthly decline for the index since November of 2001. “Beneath the headline numbers, the forward-looking new orders subcomponent fell below 50 after six months of growth, while production fell below 50 for the first time in 16 months. Meanwhile, the employment index fell to 42.1 this month, the weakest level since January 2002 and suggests that the pace of layoffs in manufacturing could be accelerating again.”

“Whether an abatement of geopolitical risks, however, will shore up manufacturing activity back onto the recovery trail is difficult to tell at this point, although underlying business fundamentals do suggest that this should be the case,” RBC says.

Nesbitt agrees that the key question is whether the energy price surge, weather, and war are temporary factors causing the weakness or whether something more fundamental and lasting is involved. “It’s tempting to sound wise and to lean toward lasting problems. We recommend simply waiting to see, but we lean heavily toward the theory that there will be a substantial post-war bounce in confidence and business activity.”

TD Bank says that the question of whether the weakness is all about the war, or rests on more fundamental factors, likely can’t be sorted out until the war ends. It sees more hand-wringing and uncertainty ahead.

“The Fed will not be stampeded by these figures,” Nesbitt concludes. “However, the clock is ticking and the Fed needs some materially stronger data by its May 6 meeting. If it does not get such data, then the overriding concern will be to err on the side of easing. This is regardless of the adverse rise in prices paid or other inflation leading indicators, and it might well prove the wrong step with 20-20 hindsight as seen from later in the year. Nonetheless, the Fed will have to act despite legitimate concerns about inflation bubbling up from the pipeline unless the theory of better growth ahead gets some support from the data soon.”