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First Cut: ISM Manufacturing Index has a second month of narrow expansion — very narrow

The ISM Manufacturing clung tenuously to expansion in February at 50.1 after 50.9 in January. The index had declines in three of five components. Survey respondents were cautiously optimistic about the prospects for further growth, but it is clear that supply chains are strained by the steps to combat the spread of COVID-19 in China and elsewhere. The two month expansion for the factory sector may not last much longer. I would anticipate that March will see a slide back below the 50-mark for the ISM index with the tailwinds from the response to contain what might be a devastating pandemic. That leaves open the possibility for a rebound if it is address quickly and effectively, but it is by no means clear that that will happen.

The new orders index — a component of the overall index and critical to maintaining expansion — fell to 49.8 in February after 52.0 in January. This is only just below the neutral mark and not much of a contraction. The index for order backlogs rose to 50.3 in February from 45.7 in January. This may be enough to smooth over the mild pullback in orders for a month or two, but global economic activity appears to be turning downward again after some slight improvement. The index for export orders dipped to 51.2 in February after 53.3 in January and may indicate that it is withdrawing what upward momentum it was imparting to US manufacturing activity. The index for imports dropped to 42.6 in February after 51.3 in January, reflective of the challenges in getting goods from China along the supply chain. This might worsen if Japan and South Korea see widespread quarantines as well.

The index for production fell back to 50.3 in February from 54.3 in January as a result of the dip in new orders and perhaps some inability to address order backlogs without necessary materials for manufacture. The index for delivery times rose to 57.3 in February after 52.9 in January, also indicative of challenges for vendor performance. Inventories fell to 46.5 as materials on hand were drawdown and could not be quickly restocked.

The index for employment was little changed at 46.9 in February from 46.6 in January. Adding to payrolls is not a priority at a time when the outlook is more uncertain.

The index for prices paid dipped to 45.9 in February after 53.3 in January, probably mainly on declines in energy costs. However, in coming months it is possible price increases will heat up with short supplies of materials.

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