ISM Manufacturing Index Signals Modestly Weaker Factory Activity

ISM Manufacturing Index Signals Modestly Weaker Factory Activity

March 1, 2023
However, Oxford Economics predicts "stronger headwinds to factory activity in the coming months as higher interest rates bite and goods demand cools."

For the fourth consecutive month, economic activity in the manufacturing sector contracted in February. This followed a 28-month period of growth, according to a report released by ISM on March 1. 

"The February ISM Manufacturing reading signals modestly weaker US factory activity," says Oren Klachkin, Lead US Economist, of Oxford Economics. "While we take it with a small grain of salt since survey-based data have recently painted an overly negative picture of the economy, we nonetheless see it as a sign that manufacturing activity is on a weakening trajectory.

"We foresee stronger headwinds to factory activity in the coming months as higher interest rates bite and goods demand cools. External demand for manufactured goods exports won't offer significant relief from challenging US domestic demand conditions."

Specific indexes are as follows:

  • New Orders Index remained in contraction territory at 47%, 4.5 percentage points higher than the figure of 42.5% recorded in January.
  • The Production Index reading of 47.3% is a 0.7-percentage point decrease compared to January's figure of 48%.
  • The Prices Index registered 51.3%, up 6.8 percentage points compared to the January figure of 44.5%.
  • The Backlog of Orders Index registered 45.1%, 1.7 percentage points higher than the January reading of 43.4%.
  • The Employment Index dropped into contraction territory, registering 49.1%, down 1.5 percentage points from January's 50.6%.
  • The Supplier Deliveries Index figure of 45.2% is 0.4 percentage point lower than the 45.6% recorded in January; readings from the last three months are the index's lowest since March 2009 (43.2%).
  • The Inventories Index registered 50.1%, 0.1 percentage point lower than the January reading of 50.2%.
  • The New Export Orders Index reading of 49.9% is 0.5 percentage point higher than January's figure of 49.4%.
  • The Imports Index continued in contraction territory at 49.9%, 2.1 percentage points above the January reading of 47.8%."

What Respondents are Saying

  • "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." [Computer & Electronic Products]
  • "A slowdown in new housing construction and concerns of a slowing economy have customers delaying purchases in an effort to destock." [Chemical Products]
  • "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." [Transportation Equipment]
  • "Expect the first half of 2023 in the U.S. to be slower than the second half. Expect slower orders throughout 2023 for Europe." [Food, Beverage & Tobacco Products]
  • "Even though our number of quotes are down, we are still staying busy, and our backlog has a lot to do with it. A backlog of 30-plus weeks is not ideal." [Machinery]
  • "Business and new orders are softening, and customers are pushing out current orders." [Plastics & Rubber Products]
  • "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." [Electrical Equipment, Appliances & Components]
  • "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." [Fabricated Metal Products]
  • "We shipped some long-term backlogged orders, enabling some progress on our current backlog." [Miscellaneous Manufacturing]
  • "Business conditions are still strong; however, inventory has exceeded our planned levels. This will impact operations until the inventory situation is resolved." [Primary Metals]
  • "While there are lingering concerns about a recession, we are not expecting a large drop-off in manufacturing this year. Worst case is flat." [Nonmetallic Mineral Products]

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