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United States PMI February 2019

United States: ISM manufacturing index dips to over two-year low in February on softer output and domestic demand

The U.S. manufacturing sector continued to seesaw in the first months of 2019, losing ground in February after sharply recovering in the previous month from a year-end slump. The Institute for Supply Management (ISM) manufacturing index fell from 56.6 in January to 54.2 in February, a 27-month low that missed analysts’ expectations of 55.0. Nevertheless, the index remained above the 50-point threshold that separates expansion from contraction in the U.S. manufacturing sector, where it has been for 30 consecutive months.

The lower index reading in February was primarily the result of a marked slowdown in output growth, itself partly reflecting a softer increase in new orders in the month. As indicated by the new export orders index, which rose modestly in February, the decelerating demand came on the back of weaker domestic dynamics. However, despite lower order growth, backlogs of work increased again after a broadly stable month in January. This likely was in good part due to softer output as well as employment growth in the month. In addition, it suggests that firms might be expecting momentum to cool down in coming months—notably due to a weakening global growth outlook—and are thus pacing their production schedule and keeping their order books filled in order to maintain a relatively steady volume of business.

Looking at supply side indicators, it is apparent that the strain on manufacturers’ supply chains observed through most of last year has rapidly subsided in the first months of 2019, with February’s data confirming the trend observed in January. Notably, input prices fell—albeit mildly—for the second month in a row, markedly contrasting the elevated inflation observed just a few months before, when the escalation of tariffs caused a surge in input prices as wary firms stockpiled materials. Moreover, supplier delivery times continued to lengthen in February, but at a softer rate compared to January, while input inventories rose at a somewhat faster pace, as did imports. On the other hand, customers’ inventories depleted at the steepest rate in eight years.

Commenting on this month’s release, Fotios Raptis, senior economist at TD Economics, noted:

“U.S. manufacturing activity remains in expansion mode, unlike many of its global peers. But, today’s report suggests that a return to the same high rate of expansion achieved through the first half of 2018 is unlikely. Still, there are some bright spots in the report. New orders held on to much of January’s gains, while the sharper drop in production could reflect temporary, weather related disruptions. Survey respondents are optimistic about the domestic outlook, but are less confident about foreign demand.”

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