The five District Bank Surveys of manufacturing on net say the downturn in the factory sector was done in December and activity started to turn around in January and firmed in February. Whether that improvement will hold up as COVID-19 outbreak expands remains to be seen. So far the sectors most affected have been in travel and tourism. But there are signs that even as new orders have picked up, supply chains for materials are feeling the strain of the quarantines in China.
Four of the five headline indexes for the District Banks were higher. The two with the best correlation with the ISM Manufacturing Index moved in opposite directions. Philadelphia’s measure continued to build upward momentum, while the Richmond index declined sharply after a big jump higher in the prior month.
My interpretation of the data is that with all of the indexes having at least a decent correlation with the ISM number, that the predominance of upward moves more than offsets the negative from the Richmond report. I’d also look at the performance of the Richmond index over the past two months which would suggest underlying conditions are somewhere between the extremes.
In calculating an equivalent index from the five components most like those used to compute the ISM Manufacturing Index, the regional reports all point to at least mild expansion for February. Here too the Philadelphia and Richmond indexes have the best correlation with the ISM number. Philadelphia’s equivalent was 58.3, its highest in five months. Richmond’s equivalent was down sharply from the hefty 59.9 in January to 53.1 in February, but it is still for modest growth.
When the ISM Manufacturing Index for February is reported at 10:00 ET on Monday, March 2, I would anticipate an increase from the 50.9 in the January data. Two months in a row above the 50-mark would seem decisive in proclaiming the end of the sector recession begun in August 2019. It now remains to be seen if that is premature if a pandemic affects global growth, not just isolated countries.
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