The United States economy continues its gradual economic recovery, with several sectors reversing their decline or returning to profitability despite an elevated unemployment rate and reduced consumer demand levels. Growth in manufacturing reflects these wider trends, expanding through February, although at a slower pace than in previous months.

According to the Institute for Supply Management's latest manufacturing ISM Report on Business, released this week, the manufacturing sector expanded for the seventh consecutive month in February, in line with the overall U.S. economy, which expanded for the 10th consecutive month.

The ISM's monthly purchasing managers' index (PMI), a key indicator of the factory sector, fell from 58.4 percent in January to 56.5 percent in February, with readings over 50 percent indicating growth. The 1.9 percentage-point drop in the PMI last month indicates that while manufacturing continued to expand, the rate of growth slowed down. The PMI remained above the 49.9-point 12-month average.

Meanwhile, the ISM's new orders index declined by 6.4 points, production fell by 7.8 points and prices dropped by 3 points — representing continued growth through February and a relatively fast pace of expansion despite the slowdown.

"While new orders and production were not as strong as they were in January, they still show significant month-over-month growth," Norbert J. Ore, chair of ISM's Manufacturing Business Survey Committee, said. "Additionally, the employment index is very encouraging, as it is up 2.8 percentage points for the month to 56.1 percent. This is the third consecutive month of growth in the employment index. With these levels of activity, manufacturers are seemingly willing to hire where they have orders to support higher employment."

According to the ISM report, 11 of the 18 manufacturing industries recorded growth last month: machinery; paper products; apparel; computer and electronic products; miscellaneous manufacturing; transportation equipment; textile mills; plastics and rubber products; electrical equipment, appliances and components; fabricated metal products; and food and beverage products.

Some experts attribute the general slowdown in manufacturing growth to a combination of inclement weather and a series of large-scale recalls in the automotive industry.

"The severe winter weather along the East Coast and Toyota's production shutdowns undoubtedly had a negative impact on manufacturing production in February," Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, explains in an analysis of this week's findings. "According to the ISM report, the adverse events last month were offset by ongoing improvement in economic activity and the inventory swing that occurs when firms have to slow their destocking, and eventually build stocks, due to continuing growth in orders."

Although February snowfalls and rain along the East Coast may have been a factor in slowing expansion, the Wall Street Journal notes that it probably also signals that the U.S. manufacturing sector is reluctant to produce more until "underlying demand" swings upward to support a stronger pace of growth.

Similarly, the Associated Press explains: "Economists cautioned that manufacturers have been ramping up production for businesses that had let their stockpiles shrink to save money. If consumer spending remains tepid, manufacturing activity — and its contribution to the economy — will decline."

The ISM's employee index reading for February was a notably positive sign for the manufacturing sector, with 10 out of 18 industries reporting job growth. Manufacturing added 11,000 jobs in January, the first employment increase for the sector since January 2007, according to the U.S. Department of Labor's latest monthly employment report.

"Manufacturing is not known as being a sector that generates many jobs quickly in a recovery," Meckstroth adds. "The [ISM] employment indicator may be signaling that job cuts were overdone broadly and the labor market will shortly start improving."

Earlier

Manufacturing Sector Expands in January

Toyota Faces Mounting Recalls

Resources

February 2010 Manufacturing ISM Report on Business
Institute for Supply Management, March 1, 2010

MAPI Analysis on ISM Index: February Report 'Encouraging'
by Daniel J. Meckstroth
Manufacturers Alliance/MAPI, March 1, 2010

Manufacturing Shows Strength
by Conor Dougherty
The Wall Street Journal, March 2, 2010

Reports Show Modest but Steady Economic Recovery
by Tali Arbel and Martin Crutsinger
The Associated Press, March 2, 2010

The Employment Situation — January 2010
U.S. Department of Labor, Feb. 5, 2010