February’s ISM reading of 49.5% was up from 48.2% in January and better than the anticipated 48.5%. Furthermore, both the important new orders index and the production index remained above 50 or accelerated. The major area of weakness was again the employment index, which was at 48.5, though this is an improvement on January’s 45.9. Comments from the respondents are certainly starting to improve slightly than has been the case over the last few quarters.
Bottom line: February’s ISM at 49.5% confirms that the manufacturing sector is still in outright contraction, although things weren’t quite as bad in January. Judging from the comments below, it also seems quite possible that the index moves back above a 50 reading in March. The reality is that while the list of headwinds here seems to be little changed from previous reports (the stronger dollar, tighter credit conditions, the decline in global demand, and the weakness in commodity prices/activity), at the margin their drag may have actually lessened slightly in the last month. Nevertheless, it is probably still too soon to be too optimistic. As New York Fed President Dudley noted yesterday, things outside of manufacturing have also started to now look a little weaker: “the latest ISM non-manufacturing index suggests the possibility of a slower pace of growth also in the service sector, which has been relatively robust” up to now. The fact that the employment index is still below 50 is also an ongoing concern, and we continue to monitor it closely to see the degree to which weakness here in the manufacturing side of the economy (reported as largely energy and apparel related companies) might start to taint the relatively solid consumer sector, upon which this recovery is still being built.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.