The Institute for Supply Management (ISM) released its purchasing managers index (PMI) this morning, showing an unexpected decline from 54.1 in January to 52.4 in February. This is the second surprising announcement this week, as durable goods numbers for January were also lower than anticipated. Both of these measures differ from the current narrative that manufacturing activity has begun to recover, with positive expectations for growth ahead.
Of course, it is important to point out that today’s release still suggests an expanding sector, albeit one that is growing a little slower than last month. Several of the subcomponents to the ISM measure reflected this easing, with new orders dropping from 57.6 to 54.9 and production falling slightly from 55.7 to 55.3. Job growth also slowed; whereas, inventory levels continued to contract. On the positive side, export growth expanded at a faster rate (although so did imports).
Not surprisingly, higher energy and raw material costs and developments in Europe are weighing on respondents’ minds. The index for raw material prices reflected an acceleration from 55.5 to 61.5. A chemical manufacturers, through sample comments provided in the press release, said, “Business is holding steady. Concern over commodity prices ongoing.” Another individual from the computer and electronics industry noted softening in global economic growth. Yet, most of the responses tended to echo the more upbeat sentiment of higher demand and production, but perhaps with some cautious. As a wood products manufacturer wrote, “Shipments are increasing over last year. Waiting to see if the trend continues.”
That last sentence pretty much sums up these ISM figures, as well. Most of us were anticipating that the PMI would rise to 55.0, reflecting stronger manufacturing growth. Instead, it pulled back a little, reversing three consecutive months of gains. New orders led the decline lower, but hopefully, this is more of a “blip” and the longer-term trend returns to being positive with March’s readings.
It does, though, suggest the fragility of our current economic recovery. Manufacturing has played an outsized role in the rebound to date, and yet, it is not immune to the headwinds that surround it.
Chad Moutray is chief economist, National Association of Manufacturers