ISM: Production Contracted for the First Time since May, but Orders Pick Up

By March 3, 2014Economy

The Institute for Supply Management (ISM) provided a mixed view of the current state of the manufacturing sector.  First and foremost, it found that production contracted for the first time since May (down from 54.8 in January to 48.2 in February). This was a sharp contrast to strong growth in output observed from August to December, with the production index averaging 62.7 over that time frame. In addition, stockpiles of inventories also rose (up from 44.0 to 52.5) in February. Poor weather conditions have reduced output and overall activity over the past two months.

A few of the sample comments spoke to the negative impact of weather. A petroleum and coal products respondent said, “Bad weather hampered logistics across the country.” Meanwhile, an apparel manufacturer commented about reduced orders due to winter storms, with “raw material disruptions” and “back-ups at the ports” cited by a business leaders from the chemical industry.

Despite these challenges, the report also suggested that sentiment has begun to bounce back. The purchasing managers’ index (PMI) rose from 51.3 to 53.2. While this remains below the 56.5 seen in December, it was a step in the right direction, giving manufacturers some hope. Indeed, the pace of new orders picked up, increasing from 51.2 to 54.5. This improvement was in domestic sales, with exports easing slightly for the month (down from 54.5 to 53.5).

On the employment front, the pace of hiring was unchanged in February from January’s 52.3. This indicated modest growth in hiring, but below the stronger rate observed from August to December (which averaged 54.6). With new jobs numbers out on Friday for February, this could suggest a slight slowdown from the 15,500 average employment increase for manufacturers observed over the prior six months.

In short, weather has wreaked havoc for manufacturers this winter, negatively impacting sales, production, and shipments. The ISM data confirm this, with output shrinking for the first time in nine months in February. Yet, this report also indicates that new orders have begun to accelerate, an encouraging sign. Leaders in the manufacturing sector continue to be cautiously optimistic about growth in 2014, particularly with the strong momentum seen at the end of 2013. Hopefully, the softness seen of late will prove to be temporary, particularly to the extent that it was weather-related.

At the same time, the recent weakness also reminds us how difficult it is for strong growth to be maintained. Friday’s downgrade in real GDP was another reminder of this. For that reason, the NAM continues to push for pro-growth measures that will lift the economy and help to give additional momentum for manufacturers and the rest of the business community.

Chad Moutray is the chief economist, National Association of Manufacturers.

Chad Moutray

Chad Moutray

Chad Moutray is chief economist for the National Association of Manufacturers (NAM), where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.
Chad Moutray

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