U.S. manufacturing climbed to best level since mid-2014

By Yemeng Yang

The U.S. manufacturing sector reported expansion in February, but it remains to be seen whether actual performance lives up to the upbeat sentiment.

The Institute of Supply Management’s report released Wednesday showed that its February purchasing managers index, or PMI, a composite indicator of the manufacturing sector, jumped 1.7 points to 57.7, the highest reading since August 2014, from 56 in January. A reading above 50 indicates that the manufacturing economy is expanding, according to the ISM.

The result indicated the sixth straight month of growth in the manufacturing sector, and well exceeded economists’ consensus of 56.2 compiled by Bloomberg.

“The string of increases in the index over the past several months suggests a steadily accelerating pace of expansion in the factory sector,” wrote Richard F. Moody, chief economist at Regions Financial Corp., in a note.

The index was bolstered by a surge in the new order index, up 4.7 points to 65.1 from 60.4 in January. All 16 manufacturing industries surveyed by ISM reported growth in new orders in February.

Production expanded for the sixth consecutive month, with the index up to 62.9 in February from 61.4.

“Add in continued growth in the pace of new orders and production should continue to show healthy growth in the months ahead,” wrote Brian Wesbury, chief economist at First Trust Advisors LP.

The employment index is the only major index that declined in February, down 1.9 points to 54.2 from January’s 56.1. But the number still suggested expansion, although at a slower pace.

New export orders remained solid, up to 55 from 54.5 in January. It indicated that the continued strength of the U.S. dollar was not offsetting rising external demand.

The U.S. manufacturing sector was expanding, except in August, in the past 12 months. (Yemeng Yang/MEDILL)

The manufacturing sector is an important indicator of the health of the U.S. economy.

“The past relationship between the PMI and the overall economy indicates . . . a 4.3 percent increase in real gross domestic product on an annualized basis,” wrote Bradley Holcomb, chair of the ISM Manufacturing Business Survey Committee, in the release.

However, the industrial production index, a measurement of the output in several industries including manufacturing, has shown a less rosy picture. The index fell 0.3 percent in January from a month earlier, while manufacturing production was up 0.2 percent.

“we suspect some of the current strength reflects a temporary post-election rise in confidence rather than any significant change yet in underlying trends,” wrote Jim O’Sullivan, chief U.S. economist at High Frequency Economics Ltd., in a note.

“Firmer demand, domestic and foreign, is setting the stage for meaningful improvement in the manufacturing sector, but much depends on the evolution of U.S. fiscal, regulatory, and trade policy in the months ahead,” wrote Moody, of Regions Financial. “Time will tell if these expectations are warranted or not.”

Photo at top: A machine at the training facility of the Technology & Manufacturing Association in Schaumburg. (Mengjie Jiang/MEDILL)