MNI INTERVIEW: Seasonals Mask Better US Manufacturing - ISM

The U.S. factory sector is on firmer footing and February's ISM manufacturing report was nearly flat after ditching seasonal distortions, Institute for Supply Management chair Timothy Fiore told MNI on Friday.

"The summary on this is that without seasonality, we grew," he said in an interview. But, "we didn't grow as much as the seasonal factors wanted us to," even though we "actually grew at the raw number level," he said. The headline composite index would have been 49.4 without seasonal factors in February, higher than the 47.8 adjusted figure, and that "is pretty much flat relative to January," which was 49.1.

The seasonally adjusted February index was below market expectations largely due to a decline in new orders (-3.3pts) and employment (-1.2pts).

"Overall, we're still on a trajectory for slow growth," Fiore said. "I'm not expecting dramatic growth in the PMI for the better part of this year. I'm expecting a 51 to a 53 PMI for quite some period of time," after potentially breaking past 50 in the March or the April report. Fifty is the dividing line that separates contraction from expansion in the sector.

NEW ORDERS DEMAND

After surging to nearly a two-year high in January, the new orders measure fell back to 49.2 last month. The February level was still the best since the summer of 2022, excluding January’s reading.

Fiore noted that ISM surveys of sentiment around demand have improved. "As far as demand softening, we've pretty much cut it in half. We saw 27% of headline comments noting softening in January, 33% in November and December, and we're down to 17% in February," he said. "Fewer people are commenting about softening. Clearly there has been a shift."

Within overall U.S. manufacturing, there has also been a change in the sectors experiencing a contraction, with fewer industries in decline and at a shallower pace relative to late last year, he said. "In December of last year, 85% of manufacturing was contracting at 49 or less in the PMI and 48% was contracting at 45 or less," Fiore said. "Now 40% of manufacturing is contracting at 49 or less and only 1% is contracting at less than 45. This is a huge change."

Still, while there is a better growth profile, Fiore said businesses are continuing to right-size staff and position for the second half of the year. The ISM employment index eased -1.2pt to 45.9. "We still think we're holding too many workers."

FED SEEN PLEASED

The ISM price index eased 0.4ppts to 52.5. Fiore said he is not worried about goods prices rebounding and commodity prices have been fluctuating, with some prices offsetting others. (See MNI INTERVIEW: Fed To Stay Patient Given Bumpy Inflation-Groen)

"The Fed would be probably pretty happy with this report," he said. "Their biggest fear is dramatically too fast growth coming out of the trough and we're not seeing that. I don't see any signs of that. Instead, the first half of the year will be lumpy and this report is one of those lumps."