Industry Market Trends

Manufacturing Sector Posts Major Gains in February

Mar 06, 2013

The U.S. manufacturing sector expanded in February at its fastest pace in more than a year, providing a healthy boost to the overall economy thanks to strong gains in demand and output.

Business activity in the U.S. manufacturing sector surged in February, continuing an ongoing rebound from a brief decline in late 2012. Last month, manufacturing grew at the fastest rate since June 2011, with the pace of expansion accelerating due to improvements in several key indicators.

According to the Institute for Supply Management's (ISM) latest manufacturing Report on Business, U.S. manufacturing expanded for the third consecutive month in February, while the overall U.S. economy grew for the 45th consecutive month.

The ISM purchasing managers index (PMI), a key monthly gauge of the factory sector, rose to 54.2 last month, up from 53.1 in January and 50.2 in December. Readings above 50 indicate overall growth for the industry, with the last monthly contraction occurring in November 2012, when the PMI stood at 49.9. February's reading remained well above the 12-month average of 51.8.

"Companies...are benefiting from growing demand as businesses boost spending and economies in emerging markets pick up," Bloomberg News reports. "Combined with a rebound in housing and sustained gains in household purchases, the factory gains will help lift growth, after the economy stagnated in the fourth quarter, even as across-the-board budget cuts set in."

While the PMI was expected to increase in February, the size of the gain exceeded most expectations. Economists surveyed by MarketWatch had forecast a reading of 52.5 for the month.

Domestic demand was strong in February, with the new orders index climbing to 57.8, up from 53.3 in January and marking the second consecutive month of rising orders. Demand last month was at its highest level since April 2011.

Meanwhile, production rose to 57.6 from 53.6 in January, marking the sixth consecutive month of growth, and the exports index climbed to 53.5 from 50.5, signaling stronger demand for U.S. manufactured goods in international markets. Imports climbed to 54 from 50 last month, and inventories inched up to 51.5 from 51.

However, employment conditions improved more slowly in February, with ISM's employment index dipping to 52.6 from 54 in January.

"The pickup in factory activity in February is encouraging because it suggests demand for goods is stronger even as consumers are paying higher Social Security taxes, which has reduced their take-home pay," the Associated Press reports. "Factory output could rise in the coming months. In January, businesses ramped up their orders for industrial machinery, electrical equipment and other capital goods by the most in more than a year. That suggested they are confident about their future growth."

Fifteen of the 18 U.S. industries tracked by the ISM posted growth last month: apparel, leather, and allied products; miscellaneous manufacturing; paper products; electrical equipment, appliances, and components; plastics and rubber products; fabricated metal products; furniture and related products; petroleum and coal products; wood products; printing and related support activities; transportation equipment; nonmetallic mineral products; food, beverage, and tobacco products; machinery; and primary metals.

The three industries that contracted last month were: textile mills; computer and electronic products; and chemical products.

Despite the positive signs in February, there are several areas of concern for the U.S. manufacturing sector. Although emerging market growth remains strong, economic instability among major trading partners, particularly China and Europe, may weaken export growth.

"China, the engine of Asian growth, kicked off the latest round of global manufacturing reports on a downbeat note. Chinese manufacturing expanded in February at a slower pace than previous months," the Wall Street Journal explains. "Meanwhile, in the euro zone, February manufacturing activity shrank at the same pace as in January, suggesting the region's economy is still struggling to escape its recession."

In addition, uncertainty over U.S. government policies may hinder manufacturing business prospects this year.

"Overall, the February ISM report suggests strong growth in the upcoming February industrial data," Daniel J. Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation, noted. "Some caution is appropriate, however. February may be a euphoric period following the resolution of the fiscal cliff but it precedes the headwinds of sequester and federal shutdown deadlines this month. MAPI expects manufacturing production to increase 2.2 percent this year, which is a slower pace than the 4.2 percent growth in 2012."