- The ISM manufacturing index remained in expansionary territory in February, despite falling back to 50.1 (50.9 in January). This was slightly weaker than the 50.5 markets were expecting.
- Sentiment was described as “cautious” compared to January. Demand slumped, with the New Orders Index contracting to a weak level, the Customers’ Inventories Index remaining at ‘too low’ status, and the Backlog of Orders Index expanding for the first time in several months, but at a slow rate.
- Consumption as measured by the production and employment indices was a drag on the index. However, inputs strengthened in February. Imports contracted (42.6 February versus 51.3 in January), with respondents citing Lunar New Year and coronavirus. New export orders also fell with many respondents citing coronavirus impacts, but remained in expansionary territory at 51.2 versus 53.3 in January.
- Manufacturing price decreased from 53.3 in January to 45.9 in February, the weakest level since last October.
- The release stated that “global supply chains are impacting most, if not all, of the manufacturing industry sectors.” Despite these impacts, growth broadened in the manufacturing sector in February. 14 of 18 manufacturing industries reported growth on the month, up from eight in January.
Key Implications
- Manufacturing output had been in the doldrums late in 2019 with little hope for a quick recovery even before COVID-19 shuttered large swaths of China’s factories. It is clear from respondents’ comments that manufacturers are increasingly worried about their supply chains. They mentioned longer lead times, and that sourcing challenges may cause production delays. Some respondents also pointed to the production shutdown at Boeing as suppressing new orders.
- It is interesting that underneath the hood of today’s weakening headline, there were signs that growth in manufacturing was at least broadening out, and the sector remained in expansion territory – above the sentiment readings posted at the end of 2019. But many respondents may have replied to the survey earlier in the month, before COVID-19 had spread further outside of China, and may not reflect the full pessimism that was likely in place by the end of the month.
- The U.S. factory sector is clearly feeling the effects of Chinese shutdowns due to COVID-19. With the virus spreading outside of China, and economies like South Korea and Japan feeling greater effects, the impacts for U.S. factories are likely to get worse before they get better.
