February manufacturing report tops expectations

Factory activity in February shrank less than predicted as gains in new orders and production provided signs that the beleaguered industry could soon stabilize.

The Institute for Supply Management’s index climbed to 49.5, the highest since September, from 48.2 in January, a report from the Tempe, Arizona-based group showed Tuesday. While the reading was just shy of 50, the dividing line between contraction and expansion, last month’s improvement corroborates other industry reports that suggest the manufacturing slump may be easing.

Factories have been plagued by a steady stream of headwinds since mid-2014, including soft overseas markets, a strengthening dollar, weakness in the capital-intensive oil industry and a buildup in inventories that reduced the need for additional production. As those hurdles start to fade, factories should also find a source of strength in domestic demand, which is being boosted by consumers with solid job gains and a nascent pickup in wage growth.

“Perhaps we found bottom and a turning point,” Bradley Holcomb, chairman of the ISM’s factory survey, said in a conference call. “I think we’re set up for things in the right direction, and I say that largely on the basis of new orders.”

The median forecast of 77 economists surveyed by Bloomberg called for 48.5. Estimates ranged from 47.2 to 51.

For the first time since August, at least half of the industries expanded in February, with 9 of 18 showing growth. Makers of wood products, textiles, furniture and chemicals were among the top performers. The list of comments by respondents also skewed to the positive, with a purchaser at a chemical company highlighting the difference between solid demand in the U.S. and softer growth internationally.

The new orders gauge last month was 51.5, matching the January reading as the highest since August. The production measure climbed to 52.8, a six-month high, from 50.2.

The employment index increased to 48.5 from 45.9, indicating factories trimmed staff at a slower pace. The February jobs report comes out on March 4.

Tuesday’s data showed shipments abroad continued to be pressured as the stronger dollar and soft global demand combine to make it harder for foreign markets to purchase U.S. goods. The export orders measure decreased to 46.5, the lowest in five months, from 47 in January. Exports have contracted in eight of the past nine months.

Last week’s second estimate of gross domestic product showed companies made less headway than originally thought in cutting back inventories in the fourth quarter, but the new year may be bringing some progress. Smaller stockpiles would boost the need for new production, helping offset the drag from trade.
Unsold Goods

The gauge of factory inventories improved to 45 in February, meaning stocks were being cut at a slower pace, from 43.5, while customer stockpiles declined to 47 from 51.5. This was the first reading lower than 50, meaning factory managers no longer believe their customers have too many goods on hand, since July.

The report also showed that while prices continue to fall, the pace of decline is starting to moderate. The prices-paid index improved to 38.5 from 33.5. The measure has been contracting since November 2014.

The ISM report adds to evidence that the pressure on manufacturing may be easing somewhat. Data published last week showed orders for capital equipment, a harbinger of business spending on machinery, computers and the like, jumped in January after plunging to a more than two-year low at the end of 2015.

A separate report from the Federal Reserve showed factory output climbed in January by the most in six months, boosted by production of consumer goods.