February’s ISM reading of 57.7% was up from 56.0% in January and is higher than the anticipated 56.0%; it also represents the sixth consecutive monthly increase. The important production index rose to 62.9%, while the new orders index experienced an even stronger increase to 65.1% from 60.4% (highest since August 2009). The employment index was a little less strong at 54.2%, but still solidly expanding. Comments from the respondents were again exceptionally optimistic about current and future demand.
Bottom line: February’s ISM at 57.7% was the strongest since August 2014, and suggests a more vigorous expansion. Sentiment from those surveyed was very encouraging, with comments once again exuding a much stronger sense of optimism that a recovery is finally gaining ground following the collapse in commodity prices. Optimism surrounding any Trump-related improvements is high, but so is uncertainty, particularly with regard to the potential for an infrastructure spending initiative. The pickup in the prices index is a major positive for many industries, and this will be helpful in defending corporate profit margins as wage cost pressure start to rise. Moving forward, the key here will be to make sure that the harder economic data (actual factory orders and industrial production) follow-through and backfill this survey response, in an effort to avoid disappointment. The Fed will be pleased with this result, and it once again strengthens the case for a rate increase in March, hinted at by NY Fed President Dudley yesterday.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.