New Orders, Prices Gains

• The ISM Manufacturing PMI increased to 47.7 in February 2023
• New Orders made up significant ground for the month with a bounce to 47.0
• Manufacturers’ costs increased for a second consecutive month in February 2023, reestablishing an expansionary footing

The ISM Manufacturing PMI report stopped its bleeding in February 2023 with a slight increase to 47.7, up from 47.4 in January. The Manufacturing report had fallen for five consecutive months through January, which put the topline result at its lowest level since 2009 – outside of the collapse endured in the early days of the U.S. economy’s pandemic-induced economic shutdowns. This diffusion index indicates the net percentage of manufacturers who are experiencing expanding or contracting activity across various categories, with a reading below 50 revealing net contraction across the manufacturing sector. While the February 2023 reading is still contractionary, overall economic activity in the U.S. suggests that gains in key forward-looking categories may well be indicative of a broader return to manufacturing industry expansion.

The New Orders component index of the ISM Manufacturing report increased to 47.0 in February 2023. While still contractionary (i.e., below the breakeven threshold of 50.0), this is the strongest reading for this component of the report since October 2022. A turnaround in New Orders coincides with ongoing consumer demand strength and a bounce in U.S. manufacturing-specific industrial production in January after declines in that metric to close out 2022. The Production component index continued its declines in February 2023 but should follow New Orders’ turnaround if renewed demand strength is confirmed in the coming months by New Orders posting results above the index’s breakeven threshold of 50.0.

Manufacturing Employment continued to hover near breakeven conditions in February 2023, coming in at 49.1 for the month. The Employment component index has posted readings between 48 and 51 since August 2022, indicating continued labor market tightness as much as easing demand for manufacturing output. The potential for renewed Manufacturing Employment gains in the coming months, given New Orders’ bounce in the February 2023 ISM Manufacturing report, poses a matter of concern for manufacturers in that labor is already scarce and wages can only be pushed up further in demand for workers picks up. The end result is the potential for another bout of upward pressure on inflation through mid-2023.

Manufacturers’ costs, as measured by the ISM Manufacturers’ PMI report Commodity Prices component index, rose strongly in February 2023 and regained expansionary territory with a reading of 51.3 for the month. The fourth quarter of 2022 had revealed manufacturing cost pressures to have stabilized, with the Prices component of the ISM Manufacturing report falling as low as 39.4 in December. There is growing concern that oil prices will regain their upward momentum as this year progresses given anticipation of stronger demand from China’s economy. Oil price gains will increase manufacturers’ costs as well as the cost of transporting goods to market, ultimately prolonging inflation’s impact in the U.S. and across the global economy. The ISM Manufacturing report’s Prices component will act as a key forward-looking indicator to this effect in the months to come.