US manufacturing sector still struggling to recover, according to ISM
March 1, 2024 – 7:02 AM PST
U.S. manufacturing continues to decline in February, with factory employment reaching a seven-month low due to a decrease in new orders.
The Institute for Supply Management (ISM) reported that its manufacturing PMI dropped to 47.8 in February, down from 49.1 in January. This marks the 16th consecutive month that the PMI has remained below 50, indicating a contraction in manufacturing.
This is the longest stretch of contraction since August 2000 to January 2002. Economists surveyed by Reuters had predicted a slight increase to 49.5. However, the ISM revised its guidance, stating that a PMI reading below 42.5 over time signifies an overall contraction in the economy, down from the previous threshold of 48.7.
Despite this decline in manufacturing, the overall economy is still growing, with a 3.2% annualized rate in the fourth quarter.
While higher borrowing costs have affected demand for goods and business investment in equipment, it is important to note that sentiment surveys, including the ISM survey, may be painting a more negative picture of manufacturing than the actual data suggests. Manufacturing accounts for 10.3% of the economy.
Market expectations are that the Federal Reserve will begin cutting interest rates sometime this year. Since March 2022, the U.S. central bank has raised its policy rate by 525 basis points to the current range of 5.25%-5.50%.
Official data from the government and Federal Reserve indicate that manufacturing has been relatively stable. Goods spending has shown fluctuations.
The ISM survey’s new orders sub-index, which provides a forward-looking perspective, dropped to 49.2 in February after rebounding to 52.5 in January.
Factory production remained subdued, with the sub-index declining to 48.4 from 50.4 in January. There were slight indications of supply chain constraints, likely due to weather-related disruptions. The survey’s measure of supplier deliveries rose to 50.1 from 49.1 in the previous month, indicating slower deliveries.
Inflation at the factory gate remained moderate, with the survey’s measure of prices paid by manufacturers slipping to 52.5 from 52.9 in January.
Factory employment continued to shrink, with the survey’s measure of manufacturing employment dropping to 45.9, the lowest reading since last July, down from 47.1 in January. However, it is worth noting that this measure has not been a reliable predictor of manufacturing payrolls in the government’s closely watched employment report. The employment report for February is scheduled to be published next Friday.
Reporting by Lucia Mutikani; Editing by Chizu Nomiyama
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How do sentiment surveys, like the ISM survey, reflect the state of the manufacturing sector and what are their limitations?
Since August 2023.
Overall, the decline in manufacturing activity in February is concerning, as it indicates a slowdown in the sector. The decrease in new orders and factory employment, along with the drop in the manufacturing PMI, are all factors contributing to this decline.
However, it is important to note that there are other indicators of the economy’s performance that suggest a different outlook. The overall economy is still growing at a 3.2% annualized rate in the fourth quarter, which indicates that while manufacturing may be experiencing a contraction, other sectors are performing well.
Additionally, sentiment surveys, including the ISM survey, may not necessarily reflect the true state of the manufacturing sector. These surveys are based on opinions and perceptions of industry professionals, and there can be biases and limitations in their responses.
It is also worth considering the impact of external factors on manufacturing, such as higher borrowing costs and supply chain constraints. These factors can contribute to a decline in demand for goods and affect business investment in equipment.
The Federal Reserve’s decision to potentially cut interest rates this year could have a positive impact on manufacturing activity by reducing borrowing costs and stimulating demand. The central bank has raised its policy rate in recent years, and a rate cut could provide relief for businesses and support growth in the sector.
Official data from the government and Federal Reserve indicate that while there may be fluctuations in goods spending, manufacturing has been relatively stable. It is important to take these data into account when assessing the state of the sector.
Looking ahead, it will be important to closely monitor the performance of the manufacturing sector and its impact on the overall economy. While the current decline in manufacturing activity is concerning, it is essential to consider other indicators and factors that can provide a more comprehensive understanding of the sector’s performance.
Addressing the challenges faced by the manufacturing sector, such as supply chain constraints and higher borrowing costs, will be crucial in supporting its recovery and ensuring its contribution to the economy.
Sources:
- ISM – https://www.ismworld.org/
- Reuters – https://www.reuters.com/
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