ISM shows February manufacturing slowdown, but industry keeps expanding

U.S. manufacturing powered through a brutal February cold snap.

The Institute for Supply Management (ISM) released its February Report on Business last week, registering a 54.2 percent PMI (Purchasing Managers’ Index) – a 2.4 percent drop from January. It’s also 3.8 percent less than the 12-month 58 percent average and the lowest reading during the year-long timeframe.

But while any PMI decrease will raise some eyebrows and possible premature calls for the next recession, it’s still the 118th consecutive month of overall economic growth throughout the industry. A PMI reading 50 percent or higher, of course, indicates expansion.

Many of the report’s noteworthy data points slowed down in February, but still indicated continued growth. New orders dropped 2.7 percent (55.5), production fell 5.7 percent (54.8), employment decreased 3.2 percent (52.3), and supplier deliveries (54.9) contracted as well.

All things considered, though, there is plenty to be optimistic about. ISM stated that 16 of 18 manufacturing sectors reported an overall expansion in February. That includes the fabricated metal products sector, which falls into more of the cautiously optimistic category.

“Business so far this year is meeting, but not exceeding, our forecast,” an anonymous representative from the fabricated metal products segment noted in the ISM report. “We are concerned about indicators showing a slight recession for the second half of the calendar year.”

ISM Manufacturing Business Survey Committee Chair Timothy Fiore says that as exports expand at stronger rates (as they did last month) and supply chain constraints ease up throughout the rest of the year, manufacturing will only continue to expend.

“Comments from the panel reflect continued expanding business strength, supported by notable demand and output, although both were softer than the prior month,” said Fiore. “Demand expansion continued, with the New Orders Index reaching the mid-50s, the Customers’ Inventories Index scoring lower and remaining too low, and the Backlog of Orders returning to a low-50s expansion level. Consumption (production and employment) continued to expand but fell a combined 8.9 points from the previous month’s levels. Inputs — expressed as supplier deliveries, inventories and imports — stabilized at a mid-50s level and had a slight negative impact on the PMI®. Inputs continue to reflect an easing business environment, confirmed by Prices Index contraction.”

Some industry analysts chalk up the dip in manufacturing output to February’s remarkably brutal winter, which is already working at a disadvantage being the shortest month.

Keith Prather, Managing Director at Armada Corporate Intelligence, says that’s a big part of the data’s story as many U.S. manufacturing sectors were impacted with weather-related factory shutdowns or workforce absenteeism. But even with the country’s wide-sweeping polar vortex that reached all the way down to the Carolinas, there was industry expansion despite a slightly weakened production month.

“I would point out that the manufacturing sector was expanding at a strong level (54.2) in an arguably tough environment,” Prather said in Armada’s most recent weekly Black Owl Report. “If it disappoints next month and we continue to see it slip, then there’s trouble afoot. We don’t think that will be the case. We think that when the smoke clears on tough winter weather conditions and the US consumer starts to suffer from spring fever…we’ll see a sharper manufacturing sector.”

And as far as those recession fears go? Prather, backed by a key recession indicator, says relax.

Gross private domestic investment data recently released as part of a Q4 GDP report from the Federal Reserve Bank of St. Louis revealed that the GPDI growth rate increase of 9.7 percent year-over-year (up from 8.7 in Q3 and 7.2 in Q2) eliminates any recession risk in the near future.

The GPDI has long been considered one of the most accurate recession predictors and, Prather states in the Black Owl Report, has gone negative year-over-year four times in history without the US going into recession.

“Based on this metric alone,” Prather said, “recession risk is off the table in the near term without something extraordinary happening.”