The Institute for Supply Management’s manufacturing index — a key gauge of U.S. factory activity — dropped to 50.1 in February from 50.9 a month earlier, falling slightly below economists’ expectations. Sluggish global growth amid the spread of the coronavirus was a factor in that drop.
Figures above 50 in the index indicate the manufacturing economy is expanding. So while the ISM’s manufacturing index (also known as the Purchasing Manager’s Index or PMI) remained in expansion territory last month, it was just barely so.
The impact of the virus outbreak has yet to be fully felt.
The ISM’s measure of new orders, typically tracked as a leading economic indicator, fell to 49.8 in February from 52 in January. The organization’s index for new export orders fell last month after accelerating to its highest level since September 2018 in January. Inventories dropped 2.3 points, to 46.5, hovering just above the 42-month low registered in November 2019.
Manufacturers reported paying less for raw materials and other inputs, and the factory employment index ticked up to 46.9 in February from 46.6 in January. This indicates employment remained in contraction territory in February for the seventh month in a row.
The manufacturing PMI was still in expansion, but barely…
What lies ahead?
The pullback in the ISM’s index was not consistent with a series of fairly upbeat readings on the manufacturing sector at the regional level. The recently released purchasing manager survey tracking the Chicago region rose to a six-month high in February, and there was a rebound in factory activity in the district that covers Texas as well.
That being said, the ISM report was soft and the decline shown in new orders, if sustained, suggests the index could reverse its January gains and continue downward in March. February may be the last month before the coronavirus takes its toll on the global supply chain; at the same time, the Boeing shutdown of its 737 Max production will hurt the domestic supply chain throughout the first quarter of the year. That impact is expected to show up in both hard and soft data.
We do not expect the PMI index to rise in the near-term, and we recommend that our clients focus on evaluating alternative supply chains and evaluating their business models while continuing to invest in their people and technology to get ahead in today’s challenging environment.