February manufacturing output declines amid strong seasonal factors

While manufacturing output inched closer to growth to start the year in January, things took a bit of a step back, by the numbers, according to the new edition of the Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).

The report’s benchmark metric, the PMI came in at 47.8 (a reading of 50 or higher indicates growth), down 1.3% compared to January’s 49.1 reading, contracting, at a faster rate, for the 16^th consecutive month.

The past 16 months of contraction were preceded by a stretch of 28 consecutive months of growth. ISM also said that the overall economy grew in January, at a slower rate, for the 46^th consecutive month.

The February PMI is 0.6% above the 12-month average of 47.2, with January 2024 marking the high for that period, at 49.1, and June 2023, at 46.4, marking the lowest.

ISM reported that eight manufacturing sectors reported growth in February, including: Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Primary Metals; Plastics & Rubber Products; Fabricated Metal Products; Chemical Products; Miscellaneous Manufacturing; and Transportation Equipment. The seven industries seeing contraction included: Furniture & Related Products; Machinery; Wood Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Paper Products; and Electrical Equipment, Appliances & Components.

The report’s key metrics mostly saw declines, including:

• New Orders, which are considered the engine that drives manufacturing, fell 3.3%, to 49.2, contracting after growing for the second time in the last 21 months, with 11 sectors reporting growth;
• Production was down 2.0%, to 48.4, contracting after growing in January for the fourth time in the last 15 months, with seven sectors reporting growth;
• Employment, at 45.9, decreased 1.2%, contracting, at a faster rate, for the fifth consecutive month, with four sectors reporting growth;
• Supplier Deliveries, at 50.1 (a reading above 50 indicates contraction), were reported as “slowing,” following growth, at a faster rate, for the 16^th consecutive month in January, with four sectors reporting slower deliveries;
• Backlog of Orders, at 46.3, saw a 1.6% decrease, contracting, at a slower rate, for the 17^th consecutive month, with five sectors reporting growth;
• Prices, at 52.5, were down 0.4%, increasing, at a slower rate, for the second consecutive month, with 11 sectors reporting paying higher prices;
• Inventories, at 45.3, fell 0.9%, contracting, at a faster rate, for the 13^th consecutive month, with six sectors reporting higher inventories; and
• Customer inventories, at 45.8, rose 2.1%, moving “too low,” at a slower rate, for the third consecutive month, with three sectors reporting growth  

Comments submitted by the ISM member panelists again highlighted various themes related to the economy and market conditions.

A Fabricated Metal Products panelist said that customer orders are steady, neither up nor down compared to last month.

“This steady state is what we budgeted and forecast,” said the panelist. “We are forecasting business to increase 2 percent to 4 percent over the next couple of months.”

And an Electrical Equipment, Appliances & Components panelist said his company is experiencing increased sales, which is putting pressure on the plant and assembly to meet new customer demand.

Tim Fiore, Chair of the ISM's Manufacturing Business Survey Committee, said in an interview that in summing up February’s performance, manufacturing output was not able to overcome the strong seasonal factors, with the PMI contracting, as well as New Orders, Production, and Inventories readings seeing what he called significant steps down, when compared to where they would have been without a negative seasonal adjustment factor.

“We grew in February compared to January on a real basis, but the summary is also that we were not able to overcome the typical prediction growth for February compared to January, as evidenced by the fact that the PMI number actually slipped,” he said.

In explaining the impact of seasonal-adjustment factors on manufacturing data, Fiore explained that over the last three years, there was no real seasonality in manufacturing, with that now factoring into ISM’s seasonal factors in a pretty strong way. As an example, he observed how in January there was a four-point step up in the New Orders number seasonal factor, with February seeing a four-point degradation, which he noted represents an eight-point swing in February’s raw data.

Putting aside the seasonality component, Fiore explained that manufacturing output is in a good place overall.

“In January, I said I think we're starting to climb out of the trough and back in December and all the way back maybe September, I'd indicated I thought we were in the trough probably starting somewhere in August,” he said. “So, we sat at the bottom August through December. In January, we had our first sign of life, although a bit of that was held by the seasonal factors, no doubt about that. In February, the PMI number kind of steps down, as does the New Orders number, but the reality is we did perform better operationally in February compared to January. We just didn't meet the seasonal expectations. That's fine. I think we're in the second month of the climb out. I think the climb out is going to be very slow and very gradual. We're not going to see any huge kind of disruptions here. And you're not going to see a huge growth spurt going on. I still think the PMI is going to break 50 by March or April. I think we're going have a positive growth month compared to February and March. If it's enough to offset the seasonal factors, I'm not sure at this point.”