Manufacturing Sector Economic Activity Contracted for 16th-Straight Month in February

Economic activity in the manufacturing sector contracted in February for the 16th consecutive month following one month of “unchanged” status and 28 months of growth prior to that, according to the latest Manufacturing ISM Report on Business from the Institute for Supply Management.

“The Manufacturing PMI registered 47.8% in February, down 1.3 percentage points from the 49.1% recorded in January,” Timothy R. Fiore, CPSM, CPM, chair of the Institute for Supply Management’s manufacturing business survey committee, said. “The overall economy continued in expansion for the 46th month after one month of contraction in April 2020. (A Manufacturing PMI above 42.5 percent, over a period of time, generally indicates an expansion of the overall economy.) The New Orders Index moved back into contraction territory at 49.2%, 3.3 percentage points lower than the 52.5% recorded in January. The February reading of the Production Index (48.4%) is two percentage points lower than January’s figure of 50.4%. The Prices Index registered 52.5%, down 0.4 percentage point compared to the reading of 52.9% in January. The Backlog of Orders Index registered 46.3%, 1.6 percentage points higher than the 44.7% recorded in January. The Employment Index registered 45.9%, down 1.2 percentage points from January’s figure of 47.1%.

“The Supplier Deliveries Index figure of 50.1% is one percentage point higher than the 49.1% recorded in January. (Supplier Deliveries is the only ISM Report on Business index that is inversed; a reading of above 50% indicates slower deliveries, which is typical as the economy improves and customer demand increases.) The Inventories Index decreased 0.9 percentage point to 45.3% from January’s reading of 46.2%.

“The New Export Orders Index reading of 51.6% is 6.4 percentage points higher than January’s figure of 45.2%. The Imports Index continued in expansion territory, registering 53%, 2.9 percentage points higher than the 50.1% reported in January. Both indexes reported their highest readings since July 2022, when the New Export Orders Index registered 52.6% and the Imports Index 54.4%.

“The U.S. manufacturing sector continued to contract (and at a faster rate compared to January), with demand slowing, output easing and inputs remaining accommodative. Demand moderated, with the (1) New Orders Index back in contraction, as seasonal headwinds were too strong to overcome, (2) New Export Orders Index returned to expansion and (3) Backlog of Orders Index improving but still in moderate contraction territory. The Customers’ Inventories Index contracted for the third consecutive month, remaining accommodative for future production.

“Output (measured by the Production and Employment indexes) dropped, with a combined 3.2-percentage point downward impact on the Manufacturing PMI calculation. Panelists’ companies maintained their production levels month over month, but that growth could not outpace seasonal factors. Head-count reductions continued in February, with notable layoff activity noted.

“Inputs — defined as supplier deliveries, inventories, prices and imports — continued to accommodate future demand growth but again showed signs of stiffening. The Supplier Deliveries Index improved again, moving into ‘slower’ territory, and the Inventories Index slid back due to inability for growth consistent with seasonal factors, remaining in moderate contraction territory. The Prices Index remained in moderate expansion (or ‘increasing’) territory as commodity driven costs continue to oscillate.

“Of the six biggest manufacturing industries, three (fabricated metal products, chemical products and transportation equipment) registered growth in February. The first two are ‘foundational’ industries, meaning those that provide products and components for other manufacturing industries.

“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. Suppliers continue to have capacity but are showing signs of struggling, due in part to their raw material supply chains. Forty percent of manufacturing gross domestic product (GDP) contracted in February, down from 62% in January. More importantly, the share of sector GDP registering a composite PMI calculation at or below 45% — a good barometer of overall manufacturing weakness — was 1% in February compared to 27% in January and 48% in December. Among the top six industries by contribution to manufacturing GDP in February, none had a PMI at or below 45% compared to two in the previous month.”

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