Report On Business® Roundup: February Manufacturing PMI®

With spring training well underway, a baseball term is appropriate to describe the impact of the Manufacturing ISM^® Report On Business^® for February on analysts and investors after the data was released on Friday.

For observers hopeful that the U.S. manufacturing sector might crawl out of its lengthy period of contraction, the composite PMI^® reading was a brushback pitch — 47.8 percent, under expectations and a 1.3-percentage point decrease compared to January’s reading.

But Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management^® Manufacturing Business Survey Committee, continued his recent bullish outlook in a conference call with reporters, saying that manufacturing is ready to “begin a growth cycle” and citing raw numbers that improved month over month in February, as well as positive panelist sentiment.

Much of that progress was somewhat masked by index numbers impacted by seasonal factors. “Everything still feels like it’s headed in the right direction,” Fiore said. “Unfortunately, the PMI^® number came down a bit in February because performance was not as strong as the seasonal factors indicated it should be. But we’ve been talking about the first half of the year being a bit bumpy, and this is one of those bumps.”

Seasonal factors are included in Manufacturing ISM^® Report On Business^® data calculation “to allow for the effects of repetitive intrayear variations resulting primarily from normal differences in weather conditions, various institutional arrangements and differences attributable to non-moveable holidays,” the report states. In February, such a factor was leap day, which provided a not-insignificant 5-percent increase in working hours compared to a 28-day month.

The biggest impact was perhaps on the New Orders Index, one of the five that directly factors into the PMI^®. In February, 24.4 percent of Business Survey Committee respondents reported an increase new order levels at their companies, while 17.4 percent noted a decrease — down from 23.5 percent in January.

That’s typically not a recipe for an index reading in contraction territory, but a 4.3-percentage point seasonal-factor headwind, Fiore said, pushed the New Orders Index down to 49.2 percent. “(The sector) covered a lot of ground,” Fiore said, “but not enough ground to overcome the seasonal factor.”

If the index of "new orders minus inventories" still has predictive power, we should start to see the ISM #manufacturing index move into expansion territory this spring pic.twitter.com/5suQSpaCbI

— Gregory Daco (@GregDaco) March 1, 2024

In February, three data points were most encouraging, Fiore said:

• Seasonal factors impacted the Production Index, which fell into contraction territory at 48.4 percent. However, Fabricated Metal Products and Chemical Products reported growth in February, which is notable because they are (1) among the six largest manufacturing industries and (2) “foundational,” meaning they provide products and components across the sector.
• The share of sector GDP with a composite PMI^® calculation at or below 45 percent — a good barometer of overall manufacturing weakness — was 1 percent in February, compared to 27 percent in January and 48 percent in December.
• The Inventories Index (45.3 percent) remained in contraction, but manufacturing companies are showing a willingness to invest in building their stocks, a good sign of executives’ confidence that demand will increase.    

“I still feel pretty good about the PMI^® breaking 50 percent in March or April because the fundamentals are there,” said Fiore, who added that 17 percent of panelists’ comments cited soft demand, down from 34 percent in November.

In other news, the Imports Index (53 percent) and New Exports Index (51.6 percent) both hit their highest levels since July 2022. Increased imports activity was expected due to Lunar New Year, Fiore said, but the New Exports Index number was somewhat of a surprise due to continuing economic challenges in such markets as China and Europe.

ISM manufacturing indices soften in Feb. Overall index at 47.8, new orders at 49.2 and employment 45.9. Prices paid at 52.5 still indicate increase but below last month's reading. pic.twitter.com/Mb7ilfXPGq

— Kathy Jones (@KathyJones) March 1, 2024

The Report On Business^® roundup:

Barron’s: U.S. Manufacturing Industry Is Still Contracting, ISM Data Show. “The manufacturing industry, a key driver of the U.S. economy, shrank at a faster-than-expected rate in February. That isn’t what investors want to hear. … There are some signs of demand improvement, added Fiore. ‘Suppliers continue to have capacity but are showing signs of struggling, due in part to their raw material supply chains.’ ”

Bloomberg: U.S. Manufacturing Gauge Drops as Industry Struggles for Momentum. “Demand softened in February after the largest monthly advance in new orders in more than three years. Measures of production and factory employment both dropped to the lowest levels since July. The latest figures are a setback for the nation’s purchasing and supply management executives who have been optimistic that U.S. manufacturing is on the cusp of expanding after being stuck in contraction territory since late 2022.”

CNBC: Construction Spending Misses Expectations to the Downside. "We were expecting (a PMI^®) of 49.5 percent; we end up with 47.8 percent,” analyst Rick Santelli said. “That means it’s the 16th consecutive month under 50. Looking at the (Prices Index), it’s 52.5 percent, lower than expected. In this case, that’s actually a good thing, considering that 52.9 percent in January was the first read above 50, going back all the way to May of last year.”

Mace News: Manufacturing in Contraction for 16th Straight Month on Pullback in New Orders, Production Mainly due to Seasonal Adjustments. “Fiore told reporters that the main index should be able to pop above the neutral line of 50 percent in March or April, adding that the February figure would be just above 49 percent 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.”

MarketWatch: U.S. Manufacturers Contract Again in February, ISM Finds, But Business Seen Picking Up. “Manufacturers have endured their worst performance since the Great Recession of 2007-09, with the ISM index in contractionary territory for 16 months in a row. Yet the economy has kept growing despite higher interest rates and the prospect of the Federal Reserve reducing borrowing costs later in the year offers fresh hope of a recovery in manufacturing.”

The US manufacturing contraction endured in February via the ISM Mfg Index. The sector's been in recession for roughly a year-and-a-half. In decades past this was a dark signal for the economy, but no longer... pic.twitter.com/d72mWcreFk

— James Picerno (@jpicerno) March 1, 2024

Reuters: U.S. Manufacturing Sector Struggling to Recover. “Though higher borrowing costs have cooled demand for goods and weighed on business investment on equipment, the ISM survey and other sentiment surveys have painted an overly dire picture of manufacturing, which accounts for 10.3 percent of the economy. … So-called hard data from the government and Federal Reserve show manufacturing mostly treading water. Goods spending has largely bounced up and down.”

ISM’s Services PMI^® will be unveiled on Tuesday, and the Hospital PMI^® on Thursday. For the most up-to-date content on the reports under the ISM^® Report On Business^® umbrella, use #ISMPMI on X, formerly known as Twitter.

(Photo credit: Getty Images/Akarawut Lohacharoenvanich)