| Consensus | Consensus Range | Actual | Previous | |
|---|---|---|---|---|
| Index | 48.0 | 47.0 to 49.0 | 47.7 | 47.4 |
Highlights
US manufacturing activity was in contraction territory for the fourth straight month in February amid falling production and recovering but still weak new orders while firms largely maintained headcounts on expectations for an pickup in the second half of 2023, although less so than in January, data from the Institute for Supply Management released Wednesday showed.
The ISM survey also showed continued upward pressures on prices, indicating the Federal Reserve still needs to raise interest rates to guide consumer inflation to its 2% target from elevated levels.
The sector index compiled by the ISM, which shows general direction, stood at 47.7 in February, up slightly from 47.4 in January for its first rise in six months, and coming in just below the median economist forecast of 48.0. It followed 48.4 in December, 49.0 in November and 50.0 in October.
"With Business Survey Committee panelists reporting softening new order rates over the previous nine months, the February composite index reading reflects companies continuing to slow outputs to better match demand for the first half of 2023 and prepare for growth in the second half of the year," Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement, repeating his recent assessment.
"Regarding the overall economy, this figure indicates a third month of contraction after a 30-month period of expansion," he said. The ISM's manufacturing PMI reading above 48.7, over time, generally indicates an expansion of the overall economy.
The index has been on a gradual downtrend since the end of 2021. The figures for the last two months remain 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 all-time low is 29.4 hit in May 1980.
"I think we are on the road to recovery on the demand side," Fiore told reporters, pointing to four factors.
The new orders index contracted for the sixth consecutive month in February, but it rose 4.5 percentage points to 47.0 from January's reading of 42.5. The new export orders index was still below the key 50 level, but continued improving, up 0.5 point at 49.9 from 49.4 in January, thanks to higher orders from China as well as surprising improvement from the Eurozone. The index reported its best performance since 52.6 in July 2022.
The customers' inventories index stood at 46.9 in February, 0.5 point lower than the 47.4 reported for January. It remains at 'too low' levels, a positive for future production. The backlog orders index registered 45.1 in February, a 1.7-point increase compared to January's reading of 43.4, indicating order backlogs contracted for the fifth consecutive month after a 27-month period of expansion.
The February ISM data is"positive for demand and growth," Fiore said, adding,"But I don't think it's positive from the viewpoint of clamping down on inflation."
The prices index stood at 51.3 in February, up 6.8 points from 44.5 in January, indicating raw materials prices increased. The index ended a four-month period in"decreasing" territory preceded by 28 straight months of"increasing" status. Panelists' comments support a return to more balanced supplier-buyer relationships, as sellers are more interested in filling order books and buyers now see the need to reorder, Fiore explained.
The employment index returned to contraction after two months of expansion, falling 1.5 percentage points to 49.1 in February from the January reading of 50.6.
Although layoffs continued in February, the hiring to reduction ratio among panelists' comments was 2-to-1, compared to 4-to-1 in the previous month."Many companies opted to maintain workforce levels to support projected second-half growth, but to a lesser degree compared to January. Turnover rates declined in the month," Fiore said.
The delivery performance of suppliers to manufacturing organizations was faster for a fifth straight month in February, as the supplier deliveries index registered 45.2, down 0.4 point from 45.6 in January. The last three readings indicate the fastest supplier delivery performance since March 2009, when the index registered 43.2.
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.
The ISM survey also showed continued upward pressures on prices, indicating the Federal Reserve still needs to raise interest rates to guide consumer inflation to its 2% target from elevated levels.
The sector index compiled by the ISM, which shows general direction, stood at 47.7 in February, up slightly from 47.4 in January for its first rise in six months, and coming in just below the median economist forecast of 48.0. It followed 48.4 in December, 49.0 in November and 50.0 in October.
"With Business Survey Committee panelists reporting softening new order rates over the previous nine months, the February composite index reading reflects companies continuing to slow outputs to better match demand for the first half of 2023 and prepare for growth in the second half of the year," Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement, repeating his recent assessment.
"Regarding the overall economy, this figure indicates a third month of contraction after a 30-month period of expansion," he said. The ISM's manufacturing PMI reading above 48.7, over time, generally indicates an expansion of the overall economy.
The index has been on a gradual downtrend since the end of 2021. The figures for the last two months remain 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 all-time low is 29.4 hit in May 1980.
"I think we are on the road to recovery on the demand side," Fiore told reporters, pointing to four factors.
The new orders index contracted for the sixth consecutive month in February, but it rose 4.5 percentage points to 47.0 from January's reading of 42.5. The new export orders index was still below the key 50 level, but continued improving, up 0.5 point at 49.9 from 49.4 in January, thanks to higher orders from China as well as surprising improvement from the Eurozone. The index reported its best performance since 52.6 in July 2022.
The customers' inventories index stood at 46.9 in February, 0.5 point lower than the 47.4 reported for January. It remains at 'too low' levels, a positive for future production. The backlog orders index registered 45.1 in February, a 1.7-point increase compared to January's reading of 43.4, indicating order backlogs contracted for the fifth consecutive month after a 27-month period of expansion.
The February ISM data is"positive for demand and growth," Fiore said, adding,"But I don't think it's positive from the viewpoint of clamping down on inflation."
The prices index stood at 51.3 in February, up 6.8 points from 44.5 in January, indicating raw materials prices increased. The index ended a four-month period in"decreasing" territory preceded by 28 straight months of"increasing" status. Panelists' comments support a return to more balanced supplier-buyer relationships, as sellers are more interested in filling order books and buyers now see the need to reorder, Fiore explained.
The employment index returned to contraction after two months of expansion, falling 1.5 percentage points to 49.1 in February from the January reading of 50.6.
Although layoffs continued in February, the hiring to reduction ratio among panelists' comments was 2-to-1, compared to 4-to-1 in the previous month."Many companies opted to maintain workforce levels to support projected second-half growth, but to a lesser degree compared to January. Turnover rates declined in the month," Fiore said.
The delivery performance of suppliers to manufacturing organizations was faster for a fifth straight month in February, as the supplier deliveries index registered 45.2, down 0.4 point from 45.6 in January. The last three readings indicate the fastest supplier delivery performance since March 2009, when the index registered 43.2.
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.
Market Consensus Before Announcement
The ISM manufacturing index has been gradually deteriorating, but February's consensus is 48.0, up from January's 47.4.
Definition
The manufacturing composite index from the Institute for Supply Management is a diffusion index calculated from five of the eleven sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms nationwide. The survey queries purchasing managers about the general direction (tracked in volumes) of production, new orders, order backlogs, their own inventories, customer inventories, employment, supplier deliveries, exports, and imports. Data on changes in input prices (prices paid) are also tracked. The five components of the composite index are new orders, production, employment, supplier deliveries, and inventories (their own, not customer inventories). The five components are equally weighted. The questions are qualitative rather than quantitative; that is, they ask about the general direction rather than the specific level of activity. Each question is adjusted into a diffusion index which is calculated by adding the percentage of positive responses to one-half of the unchanged responses.
Description
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM manufacturing index, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
The ISM manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. More than one of the ISM sub-indexes provide insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on this report which helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report.
Importance
The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is enhanced by the fact that it is available very early in the month and is not subject to revision.
Interpretation
The bond market will rally (fall) when the ISM manufacturing index is weaker (stronger) than expected. Equity markets prefer lower interest rates and could rally with the bond market. However, a healthy manufacturing sector, indicated by rising ISM index levels, bodes well for corporate earnings and is bullish for the stock market.
The level of the ISM manufacturing index indicates whether manufacturing and the overall economy are growing or declining. Historically, readings of 50 percent or above are associated with an expanding manufacturing sector and healthy GDP growth overall. Readings below 50 indicate a contracting manufacturing sector but overall GDP growth is still positive until the ISM index falls below 42.5 (based on statistics through January 2011). Readings in between these two levels suggest that manufacturing is declining while GDP is still growing but only very slowly.
In addition to the ISM manufacturing composite index, the various sub-components contain useful information about manufacturing activity. The production component is related to industrial production, new orders to durable goods orders, employment to factory payrolls, prices to producer prices, export orders to merchandise trade exports and import orders to merchandise imports.
Vendor (supplier) deliveries are an important component of report. The more slowly orders are filled and delivered, the stronger the economic growth and the greater the potential for inflation. When orders are filled quickly, it means that producers don't have as many to fill.
The ISM manufacturing composite index and its sub-components can be subject to some monthly volatility, making the three-month average of the monthly levels more indicative of the trend.
The ISM manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. More than one of the ISM sub-indexes provide insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on this report which helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report.
Importance
The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is enhanced by the fact that it is available very early in the month and is not subject to revision.
Interpretation
The bond market will rally (fall) when the ISM manufacturing index is weaker (stronger) than expected. Equity markets prefer lower interest rates and could rally with the bond market. However, a healthy manufacturing sector, indicated by rising ISM index levels, bodes well for corporate earnings and is bullish for the stock market.
The level of the ISM manufacturing index indicates whether manufacturing and the overall economy are growing or declining. Historically, readings of 50 percent or above are associated with an expanding manufacturing sector and healthy GDP growth overall. Readings below 50 indicate a contracting manufacturing sector but overall GDP growth is still positive until the ISM index falls below 42.5 (based on statistics through January 2011). Readings in between these two levels suggest that manufacturing is declining while GDP is still growing but only very slowly.
In addition to the ISM manufacturing composite index, the various sub-components contain useful information about manufacturing activity. The production component is related to industrial production, new orders to durable goods orders, employment to factory payrolls, prices to producer prices, export orders to merchandise trade exports and import orders to merchandise imports.
Vendor (supplier) deliveries are an important component of report. The more slowly orders are filled and delivered, the stronger the economic growth and the greater the potential for inflation. When orders are filled quickly, it means that producers don't have as many to fill.
The ISM manufacturing composite index and its sub-components can be subject to some monthly volatility, making the three-month average of the monthly levels more indicative of the trend.
