ISM reports strong manufacturing gains for February

Manufacturing output in February headed up from a January on the way to its highest level in a year, according to data issued today by the Institute for Supply Management (ISM).

In its monthly Manufacturing Report on Business, ISM said that the report’s key metric, the PMI, was 60.8 (a reading of 50 or higher indicates growth), which was 2.1% higher than January’s 58.7, and matched the 60.8 PMI recorded in February 2018, with the overall economy growing for the ninth consecutive month. The February PMI reading is 6.8% above the 12-month average of 54.0.

ISM reported that 16 of the 18 manufacturing sectors it tracks saw growth in February, including: Textile Mills; Electrical Equipment, Appliances & Components; Primary Metals; Paper Products; Chemical Products; Machinery; Fabricated Metal Products; Transportation Equipment; Wood Products; Plastics & Rubber Products; Computer & Electronic Products; Apparel, Leather & Allied Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; Furniture & Related Products; and Nonmetallic Mineral Products. The two industries reporting contraction in February are: Printing & Related Support Activities; and Petroleum & Coal Products.

Each of the report’s key manufacturing metrics saw gains in February.
New orders, which are commonly referred to as the engine that drives manufacturing, increased 3.7%, to 64.8, growing for the ninth consecutive month with 13 of the 18 manufacturing sectors reporting growth for the month, including five of the six largest manufacturing sectors: Transportation Equipment; Chemical Products; Fabricated Metal Products; Computer & Electronic Products; and Food, Beverage & Tobacco Products.

Production—at 63.2—rose 2.5%, growing, at a faster rate, for the ninth consecutive month, with 14 manufacturing sectors reporting growth for the month. This represented the eighth consecutive month that the reading topped the 60 mark. Employment—at 54.4—rose 1.8%, to 54.4, growing, at a faster rate, for the third consecutive month, with ISM noting that continued strong new order levels, low customer inventories and an expanding backlog indicate potential employment strength over the balance of the first quarter.

Other notable metrics included:

Supplier deliveries—at 72.0 (a reading above 50 indicates contraction)—slowed, at a faster rate, for the 60th consecutive month, with the report observing that transportation challenges and challenges in supplier labor markets are still constraining production growth, to a greater extent compared to January;
Backlog of orders—at 64.0—grew 4.3%, rising at a faster rate for the eighth consecutive month, with ISM noting that new order intakes continue to more than fully offset production outputs. This represents the second-highest reading going back to January 1993, when ISM first started tracking this subindex, and the only month with a higher reading was April 2004’s 66.5; and
Prices up 3.9%, to 86.0, increasing, at a faster rate, for the ninth consecutive month, and marking its highest reading going back to May 2008’s 88.1
ISM member respondent comments in the report were mixed, highlighting how COVID-19 continues to impact manufacturing operations and output.

“The coronavirus [COVID-19] pandemic is affecting us in terms of getting material to build from local and our overseas third- and fourth-tier suppliers,” said a Computer & Electronic Products respondent. “Suppliers are complaining of [a lack of] available resources [people] for manufacturing, creating major delivery issues.”

A chemical products respondent said that supply chains are depleted, with inventories up and down the supply chain empty, coupled with lead times increasing, prices increasing and demand increasing, with the deep freeze in the Gulf Coast expected to extend duration of shortages

In an interview, Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee, said that when the PMI hit 60.8, in February 2018, it was the beginning of the peak period, which ran through August 2018, a six-month period that he said was running at a very high level.

“We are kind of back to that now,” he said. “This is the ninth month of continuing manufacturing expansion, which is leading the U.S. out of the post-pandemic doldrums. We had five of the top six manufacturing sectors with PMI readings above 60, which is what drove the overall PMI number, with the only one down, petroleum and coal products [which was flat] will likely be in the low-to-mid 50s in March based on what is happening in the fuel markets. March is likely to be better than February, with some possible easing on supplier deliveries.”

Addressing the manufacturing labor workforce, which Fiore said is holding back total output, he said that by mid-to-late summer, when the majority of the population is vaccinated and unemployment benefits expire again, with the assumption that Congress will extend the benefits from March through July, is continuing to negatively impact things, in that it is causing people to not return to work.

“Once that goes away, the vaccines are widescale, and the workplace is starting to return to normal, I think it will be a pretty significant second half of the year,” he said. “In the meantime, the first half is doing really well, with strong new orders and export orders [up 2.3% to 57.2 in February], low customer inventories [down 0.6% to 32.5 in February], shelves are still empty, and the backlog of orders number at its highest level in years. That is a big indicator that factories are not able to produce everything they are being asked for and is supported by the fact that customer inventories are way too low.”

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