–ISM Manufacturing Index 47.8 Vs. 49.1 in January; Median Forecast 49.5
–ISM’s Fiore: Index Likely to Rise Above Neutral Line of 50 in March or April
–Fiore: Pandemic-era Seasonal Adjustments Causing Volatility in Subindexes
By Max Sato
(MaceNews) – U.S. manufacturing activity was in contraction territory for the 16th straight month in February, with the key index giving up some of a hefty gain in January in light of a pullback in new orders, but production appears to be stable, data from the Institute for Supply Management released Friday showed.
The sector index compiled by the ISM, which shows general direction, fell 1.3 percentage points to 47.8 in February after rising 2.0 points to 49.1 in January. It was weaker than the median economist forecast of 49.5 and remains below 50, which indicates contraction in the sector.
“Demand is at the early stages of recovery, and production execution is relatively stable compared to January, as panelists’ companies begin to prepare for expansion,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. “Suppliers continue to have capacity but are showing signs of struggling, due in part to their raw material supply chains.”
Fiore told reporters that the main index should be able to pop above the neutral line of 50 in March or April, adding that the February figure would be just above 49 without unfavorable seasonal factors. Last month he said he was “still bullish” about his prediction made earlier that the index would go above 50 in March.
“I still feel good about breaking 50 in March,” he said. “I’d like a caveat: Maybe I’m not as confident as I was. Maybe it might be in April but it’s going to happen pretty soon because fundamentals are there.”
“With the pandemic period of last three years having a significant impact on our seasonal factors, we are starting to feel a little bit of volatility here,” Fiore said. “We had a 4.2-point benefit in January on new order levels from a seasonal factor; this month (in February) we had a 4.3-point headwind.”
He also said February this year had 29 days, an extra working day compared to February in the previous three years, which contributed to volatility in subindexes after seasonal adjustments.
“Panelists’ companies essentially maintained output levels from January, but due to seasonality adjustments, expansion wasn’t fast enough to avoid a subindex reading in contraction territory,” Fiore said in a statement. “Overall, production rates have been essentially stable since July 2023, with slight month-over-month declines consistent with reductions in demand and backlog,”
Among the five subindexes that directly factor into the manufacturing PMI, the new orders index fell 3.3 percentage points to 49.2 in February after rising 5.5 points to 52.5 in January (a pullback was expected). It slipped back into negative territory after posting the first growth in 17 months in January. Fiore said seasonal headwinds were too strong to overcome.
The production index also dipped 2.0 points to 48.4 in February after rising 0.5 point to 50.4 in January to show growth for the first time in eight months. It is not a strong contraction, Fiore said. “We actually produced more (in raw numbers) but we didn’t produce enough to offset seasonal factors,” he said, adding that an unadjusted production number would have been around 50.4 in February.
The employment index contracted for the fifth straight month. It slipped 1.2 points to 45.9 after falling 0.4 point to 47.1 in January. Firms continued to reduce head counts using layoffs, which accounted for 50% of reduction activity, as we;; as attrition and hiring freezes. “Panelists’ comments in February were equally split between their companies adding and reducing head counts,” Fiore said. “This approximately 1-to-1 ratio has been consistent since October 2023.”
The delivery performance of suppliers to manufacturing organizations was “slower” after 16 months of being “faster.” The supplier deliveries index rose 1.0 point to 50.1 after rising 2.1 points to 49.1. This is the only ISM subindex that is inversed; a reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases.
Fiore said suppliers’ delivery promises appear to be more stable as inputs transition to a more demand-driven environment but that supplier responsiveness also appears to be ‘stiffer,’ meaning some suppliers are struggling to keep up.
The manufacturing inventories index has contracted for 13 months. It fell 0.9 point to 45.3 after rising 2.3 points to 46.2 in January.
Among other subindexes, the customers’ inventories index rose 2.1 points to 45.8 after slumping 4.4 points to 43.7 in January, which was the lowest since October 2022 (41.6). It indicates the level is “too low.”
The prices index indicated growth for the second month in a row after showing the first increase in nine months in January, when member firms agreed to pay higher costs for some commodities. It fell 0.4 point to 52.5 in February after surging 7.7 points to 52.9 in January, which was the highest since 53.2 in April 2023. Fiore said falling energy prices are offsetting higher prices for some commodities.
The backlog orders index has remained below 50, and thus in contraction, for 17 months. It rose 1.6 points to 46.3 in February, reaching the highest since 50.9 in September 2022, after dipping 0.6 point to 44.7 in January. It slumped 5.6 points to 37.5 in May 2023, which is the lowest since the Great Recession (33.6 in February 2009).
The new export orders index was in expansion territory, after contracting for eight months, in light of improving orders from China and Europe. It jumped 6.4 points to 51.6, hitting the highest since 52.6 in July 2022, after falling 4.7 points to 45.2 in January. It rose 0.2 point to the neutral level of 50.0 in May 2023, which was preceded by nine straight months in contraction territory and 25 months of expansion from July 2020 to July 2022.
The ISM main index has been on a downtrend since it fell 2.7 points to 53.4 in June 2022 but it seems to have hit a bottom in June 2023 at 46.4, 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 pandemic high was 63.8 recorded in May 2021. The all-time low is 29.4 hit in May 1980.
To assess the overall economic climate, the latest ISM survey indicates the overall economy grew for the 46th straight month after one month of contraction in April 2020. The ISM’s manufacturing PMI reading above 42.5, over time, generally indicates an expansion of the U.S. economy. The February survey showed that 40% of manufacturing gross domestic product contracted, down further from 62% in January.
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.