US Manufacturing Contracts Deeper, but Glimmers of Hope Emerge
In February, U.S. manufacturing faced further challenges as a key measure of factory employment dropped to a seven-month low, indicating ongoing layoffs. However, there were optimistic signals suggesting that the sector might be on the brink of recovery, according to a survey from the Institute for Supply Management (ISM) released on March 1.
The ISM survey disclosed that its manufacturing Purchasing Managers’ Index (PMI) fell to 47.8 last month from 49.1 in January. This marks the 16th consecutive month that the PMI has remained below 50, indicating a contraction in the manufacturing sector. However, the report highlighted positive signs, such as customer inventories declining for a third straight month. This development was considered favorable for future new orders and production growth, according to the ISM.
Manufacturers also provided upbeat comments in the survey, with some noting that “demand has finally picked up,” and others reporting “increased sales.” Shannon Grein, an economist at Wells Fargo, expressed optimism, stating, “We see some encouraging signs of life in manufacturing.”
Economists surveyed by Reuters had anticipated the index to edge up to 49.5. The share of PMI components with readings at or below 45, a barometer of overall manufacturing weakness, dropped to 1% last month, compared to 27% and 48% in January and December, respectively.
A PMI reading below 42.5 over time is considered indicative of an overall economic contraction, according to the ISM. The guidance for this threshold has been revised down from 48.7. Despite the challenges faced by manufacturing, the broader U.S. economy continues to grow, expanding at a 3.2% annualized rate in the fourth quarter.
While the ISM survey has painted a somewhat pessimistic picture of manufacturing, accounting for 10.3% of the economy, other indicators, including government and Federal Reserve data, suggest that the sector is mostly maintaining stability. The Federal Reserve is anticipated to commence interest rate cuts later this year, responding to economic conditions that have been influenced, in part, by higher borrowing costs dampening demand for goods and affecting business investment in equipment. Since March 2022, the central bank has raised its policy rate by 525 basis points to the current range of 5.25%-5.50%.
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