Industry Market Trends

Manufacturing Growth Slows in February

Mar 01, 2012

The U.S. manufacturing industry continued to expand in February, albeit at a decelerated pace from the previous month due to slowdowns in new orders, production and employment.

Business activity in the United States manufacturing sector posted moderate growth in February, although the rate of expansion slowed, ending a series of accelerating gains in the pace of growth through the last three months. Despite the slowdown, prospects for manufacturing remain strong, with most manufacturers maintaining a positive outlook for the coming months.

According to the Institute for Supply Management's (ISM) latest manufacturing Report on Business, U.S. manufacturing expanded for the 31st consecutive month in February, reflecting overall growth in the U.S. economy, which expanded for the 34th consecutive month.

The ISM purchasing managers' index (PMI), a key monthly gauge of the factory sector, dropped to 52.4 last month, down from 54.1 in January and 53.1 in December. Readings above 50 indicate overall growth for the industry, meaning that manufacturing activity continued to expand in February, but at a slower pace. The latest PMI reading was below the 12-month average of 54.1.

"The [February PMI] figure is at odds with regional manufacturing data for the month, showing the factory expansion accelerated," Bloomberg News reports. "While gains in auto sales and increased exports are contributing to growth in the industry, higher fuel costs and less inventory expansion may be limiting orders."

The deceleration in growth came as a surprise, with experts surveyed by Bloomberg News forecasting the PMI to rise to 54.5 in February, while economists polled by MarketWatch expected the PMI to reach 55.

The ISM new orders index decreased to 54.9 in February, down from 57.6 in January, but marking the 34th consecutive month of growing demand for products and services. New orders reached their highest level in nine months in January. Production also dipped, falling to 55.3 in February from 55.7 the previous month, while supplier deliveries dropped to 49 from the 53.6 reading in January.

The employment index posted a slight decline as well, falling from 54.3 in January to 53.2 in February, although increases in factory payrolls may be slowing down due to the impressive 50,000 jobs added to manufacturing in the first month of the year.

Eleven of the 18 industries tracked by the ISM reported growth last month: apparel, leather and allied products; machinery; primary metals; transportation equipment; petroleum and coal products; fabricated metal products; paper products; computer and electronic products; food, beverage and tobacco products; miscellaneous manufacturing; and chemical products.

"February's report reinforces the view that manufacturing is growing faster than the economy as a whole," Daniel Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), explains in an analysis of the ISM report. "Growth in factory output is benefiting from pent up demand for durable goods (principally motor vehicles), relatively high factory utilization creating the need for business equipment replacement and capacity expanding investment, and a competitive exchange rate remains conducive for exports."

Meanwhile, four industries reported contraction in February: furniture and related products; nonmetallic mineral products; plastics and rubber products; and electrical equipment, appliances and components.

Despite the slowdown, comments from manufacturers surveyed in the ISM report "continue to reflect a generally positive outlook for the next few months," according to Bradley J. Holcomb, chair of the ISM's Manufacturing Business Survey Committee.

Manufacturing exports grew at a rapid pace in February, climbing to 59.5 from 55 the previous month. Imports also rose to 54 from 52.5. Inventories remained unchanged at 49.5.

"U.S. manufacturing has grown in part because consumers are spending more on cars, appliances and computers. Auto sales have rebounded strongly from the spring, when Japan's earthquake and tsunami interrupted supply chains and fewer cars were available on dealer lots," the Associated Press reports. "Businesses have also stepped up spending on industrial machinery and other capital goods last year, partly to take advantage of an investment tax credit. Orders for those goods slipped in January after the tax credit expired. But most economists expect demand for industrial goods to keep growing this year."