Manufacturing activity fell in February, improves from January

Economic activity in the manufacturing sector fell in February for the fourth consecutive month, but the activity was not as weak as it was in January, according to the Institute for Supply Management (ISM). Still, ISM said GDP declined by 0.3% on an annual basis.

The ISM released Wednesday (March 1) the February Manufacturing ISM Report on Business that shows the purchasing managers’ index (PMI) rose by 0.3 percentage points to 47.7% from January. A reading below 50% indicates the manufacturing sector is contracting. A reading below 48.7% indicates the overall economy is contracting. The PMI has been below 48.7% for three consecutive months.

According to the February report, new orders, production and backlogs contracted. Supplier deliveries accelerated. Raw materials inventories rose, while customers’ inventories remained too low. Prices increased. And, exports and imports contracted.

“The U.S. manufacturing sector again contracted, with the Manufacturing PMI improving marginally over the previous month,” said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee. “With Business Survey Committee panelists reporting softening new order rates over the previous nine months, the February composite index reading reflects companies continuing to slow outputs to better match demand for the first half of 2023 and prepare for growth in the second half of the year.”

The report shows that employment contracted after expanding for two consecutive months. Even so, panelists’ companies indicated that they will not substantially reduce staff, “as sentiment is positive about the second half of the year, though slightly less so compared to January,” Fiore said.

Four manufacturing industries reported growth in February: apparel, leather and allied products; transportation equipment; petroleum and coal products; and electrical equipment, appliances and components. Fourteen manufacturing industries reported contracting in February.

“New order rates remain sluggish due to buyer and supplier disagreements regarding price levels and delivery lead times,” Fiore said. “The index increase suggests progress in February. Panelists’ companies continue to attempt to maintain head-count levels through the projected slow first half of the year in preparation for a stronger performance in the second half. Eighty-two percent of manufacturing GDP is contracting, down from 86% in January. In February, fewer industries contracted strongly: The share of sector industries with a composite PMI calculation at or below 45% — a good barometer of overall manufacturing sluggishness — was 10%, an improvement compared to 26% in January.”

In the report, respondents reported mixed levels of output and consumer demand amid economic uncertainty.

A respondent in the computer and electronic products industry said “good start to the year for bookings. Electronic components, specifically processors, continue to be challenging due to the risk of not hitting the commit dates, even with the extended lead times quoted.”

In the chemical products industry, a respondent said customers are delaying orders “in an effort to destock.” Similarly, a respondent in the plastics and rubber products industry said “business and new orders are softening, and customers are pushing out current orders.”

A respondent in the transportation equipment industry said “sales remain solid, and most assembly plants are running at capacity. There is concern for the global supply chain now that we are restricting sales of some semiconductors to China.”

A respondent in the food, beverage and tobacco products industry expects the first half of 2023 to be slower than the second half of the year in the United States. Orders are expected to be lower throughout 2023 for Europe.

“Even though our number of quotes are down, we are still staying busy, and our backlog has a lot to do with it,” according to a machinery industry respondent. “A backlog of 30-plus weeks is not ideal.” Meanwhile, a respondent in the miscellaneous manufacturing industry noted some improvement in its order backlogs.

A respondent in the electrical equipment, appliances and components industry said “new orders are steady. Production has been running consistently for several months. Many items remain in short supply, particularly anything electronics, and require daily monitoring to ensure supply.”

A respondent in the fabricated metal products industry said “new orders are still strong; however, we continue to experience price increases although at a slower rate than a year ago, which we have not accounted for in this year’s budget. Restoring lost margin due to cost increases is a top priority.”

In the primary metals industry, a respondent said “business conditions are still strong; however, inventory has exceeded our planned levels. This will impact operations until the inventory situation is resolved.”

A respondent in the nonmetallic mineral products industry doesn’t expect a “large drop-off in manufacturing this year. Worst case is flat.”