–ISM’s Fiore: Sector on Road to Recovery; New Orders in Contraction but Up from January
–Fiore: Firms Largely Keeping Headcounts to Prepare for Recovery in 2nd Half
–Fiore: Prices Subindex Above 50 for 1st Time in 5 Months, Indicating Increasing Costs
–Fiore: February Data Positive for Demand, Growth, Not So Positive for Bringing Inflation Down
By Max Sato
(MaceNews) – U.S. manufacturing activity was in contraction territory for the fourth straight month in February amid falling production and recovering but still weak new orders, but firms largely maintained headcounts on expectations for a pickup in the second half of 2023, although less so than in January, data from the Institute for Supply Management released Wednesday showed.
The ISM survey also showed continued upward pressures on prices, indicating the Federal Reserve still needs to raise interest rates to guide consumer inflation to its 2% target from elevated levels.
The sector index compiled by the ISM, which shows general direction, stood at 47.7 in February, up slightly from 47.4 in January for its first rise in six months, and coming in just below the median economist forecast of 48.0. It followed 48.4 in December, 49.0 in November and 50.0 in October.
“With Business Survey Committee panelists reporting softening new order rates over the previous nine months, the February composite index reading reflects companies continuing to slow outputs to better match demand for the first half of 2023 and prepare for growth in the second half of the year,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement.
“Regarding the overall economy, this figure indicates a third month of contraction after a 30-month period of expansion,” he said. The ISM’s manufacturing PMI reading above 48.7, over time, generally indicates an expansion of the overall economy.
The index has been on a gradual downtrend since the end of 2021. The figures for the last two months remain the lowest since May 2020, when the index at 43.5 was recovering from a recent low of 41.8 the previous month during the first wave of the pandemic. The all-time low is 29.4 hit in May 1980.
“I think we are on the road to recovery on the demand side,” Fiore told reporters, pointing to four factors.
The new orders index contracted for the sixth consecutive month in February, but it rose 4.5 percentage points to 47.0 from January’s reading of 42.5. The new export orders index was still below the key 50 level, but continued improving, up 0.5 point at 49.9 from 49.4 in January, thanks to higher orders from China as well as surprising improvement from the Eurozone. The index reported its best performance since 52.6 in July 2022.
The customers’ inventories index stood at 46.9 in February, 0.5 point lower than the 47.4 reported for January. It remains at ‘too low’ levels, a positive for future production. The backlog orders index registered 45.1 in February, a 1.7-point increase compared to January’s reading of 43.4, indicating order backlogs contracted for the fifth consecutive month after a 27-month period of expansion.
The February ISM data is “positive for demand and growth,” Fiore said, adding, “But I don’t think it’s positive from the view point of clamping down on inflation.”
The prices index stood at 51.3 in February, up 6.8 points from 44.5 in January, indicating raw materials prices increased. The index ended a four-month period in “decreasing” territory preceded by 28 straight months of “increasing” status. Panelists’ comments support a return to more balanced supplier-buyer relationships, as sellers are more interested in filling order books and buyers now see the need to reorder, Fiore explained.
The employment index returned to contraction after two months of expansion, falling 1.5 percentage points to 49.1 in February from the January reading of 50.6.
Although layoffs continued in February, the hiring to reduction ratio among panelists’ comments was 2-to-1, compared to 4-to-1 in the previous month. “Many companies opted to maintain workforce levels to support projected second-half growth, but to a lesser degree compared to January. Turnover rates declined in the month,” Fiore said.
The delivery performance of suppliers to manufacturing organizations was faster for a fifth straight month in February, as the supplier deliveries index registered 45.2, down 0.4 point from 45.6 in January. The last three readings indicate the fastest supplier delivery performance since March 2009, when the index registered 43.2.
The manufacturing sector is in the sixth contracting phase in the past 20 years. Previously, the ISM manufacturing PMI posted contraction just before the pandemic hit the global economy, from August to December 2019 and from March to May 2020. The deepest slump in the past two decades was recorded from September 2008 until July 2009 (the bottom was 34.5 in December 2008) triggered by the U.S. credit crisis.
Contact this reporter: max@macenews.com
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