The RSM US Manufacturing Index implies improvement in national manufacturing sentiment in February, and we expect a similar uptick in the February ISM survey of manufacturing sentiment next month. However, February may be the last month before the coronavirus takes its toll on the global supply chain; at the same time, the Boeing shutdown will adversely impact the domestic supply chain throughout the first quarter of the year–the impact is expected to show up in both hard and soft data.
We urge our clients and investors to take the February sentiment data with a grain of salt and focus on the verbatims in the survey for signs of stress around both of the aforementioned factors.
The RSM MOI is a composite index based on surveys by six regional Federal Reserve banks. It had been in decline since April 2018 and was negative from June 2019 through December. But signs of improved manufacturing conditions became apparent in January and are now visible in February in four of the five regions reporting. The regions of Philadelphia, New York, Dallas and Kansas City led the index higher. Meanwhile, manufacturing in the Richmond region remains underwater.
The results convey some semblance of renewed optimism for manufacturing sales. Again, that optimism needs to be tempered by the situation affecting Boeing’s 737 Max aircraft and the global health crisis.
The RSM MOI tends to anticipate economist forecasts of the widely followed ISM manufacturing index, known as the Purchasing Managers Index, which will be released on March 2. In recent days, economists have begun lowering their expectations for manufacturing. The ISM is expected to show a second month of growth in manufacturing, though barely so. The median forecast for February’s ISM has fallen to 50.5, down slightly from the 50.9 reported in January. Any measure above 50 implies expansion in the sector.
Industrial production and the Leading Economic Indicator
The improvement in manufacturing in the first months of the year appears to have been anticipated by the Conference Board’s Leading Economic Indicator, or LEI, which moved slightly higher in January at a 0.9% yearly rate from its meager 0.1% pace in December. Trends in the LEI have traditionally coincided with trends in industrial-sector activity. Holding to form, industrial production remained negative in January at a -0.8% rate, but was less negative than December’s -0.9% rate of yearly growth.
In the current business cycle, the LEI has been propped up by a robust stock market and accommodative credit conditions, which appear to be the product of tax cuts in 2017 and the spurt of consumer spending that followed. Still, the leading indicator was flat or negative for nine of the 15 months from September 2018 to December 2019, when the U.S.-China trade war and increased policy uncertainty began to have an effect on the real economy. With the full measure of the Boeing shutdown and the looming health crisis still to be accounted for, the upturns in the Leading Economic Indicator and industrial production could be transitory.