The Institute for Supply Management (ISM) manufacturing index shed 2.4 percentage points to 54.2 in February, giving back January’s gains. Markets were expecting a relatively flat reading.
Aside from inventories (+0.6 points to 53.4), four of the five subcomponents that comprise the headline index declined in February. The good news is that activity continues to expand, just at a slower pace. Production led the way lower, (-5.7 to 54.8), wiping out much of January’s gain. Employment (-3.2 to 52.3), new orders (-2.7 to 55.5), and supplier deliveries (-1.3 to 54.9) round out the remaining subcomponents.
The trade components of the report firmed a bit in February. Nevertheless, both the moves in new export orders (+1 to 52.8), and import orders (+1.5 to 55.3) were not material enough to suggest a reversal of the downtrend that’s been ongoing since U.S. imposed steel and aluminum tariffs last March.
Prices paid held steady in February (-0.2 to 49.4), maintaining January’s pullback. We caution that large price moves are not unusual, given volatile commodity prices and the fact that the index is not seasonally adjusted. Reduced price pressures continue to reflect declines in the price of aluminum and steel products (prices have now normalized near pre-tariff levels), and crude oil/gas.
Sixteen of eighteen manufacturing industries reported growth in February, up from fourteen in January. For the second consecutive month, only the nonmetallic mineral products industry reported a contraction.
Key Implications
U.S. manufacturing activity remains in expansion mode, unlike many of its global peers. But, today’s report suggests that a return to the same high rate of expansion achieved through the first half of 2018 is unlikely. Still, there are some bright spots in the report. New orders held on to much of January’s gains, while the sharper drop in production could reflect temporary, weather related disruptions. Survey respondents are optimistic about the domestic outlook, but are less confident about foreign demand. For the second consecutive month there were no comments about labor shortages, however electronic component shortages persist.
Elsewhere, there were few signs that the rout in global manufacturing activity is easing. This morning’s surveys confirm a broadening contraction in activity in the Euro Area in February, with new orders contracting faster than production – a sign of more pain to come. Germany and Italy are leading the decline, but weakness has spread to Spain. The global economic slowdown continues to weigh on Asian manufacturers as well. Japanese, Chinese, and ASEAN manufacturers suggest ongoing contraction, but somewhat less so in China. With trade and Brexit uncertainty clouding the horizon for some time to come, weak foreign demand will continue to test the mettle of U.S. manufacturers in the near-term.
