Cost Modeling

ISM Reports Manufacturing Expands but Electronics Sector “Under Pressure”

05 March 2013

Manufacturing activity in the U.S. grew for the third consecutive month in February, according to the Institute of Supply Management’s monthly Report on Business, at a rate that seems sustainable for the near-term.

The ISM’s measurement for manufacturing growth, the PMI, reached 54.2 percent in February, up from 53.1 percent in January. Any number over 50 indicates expansion; a number below 50 signals contraction.

“It’s a very positive report,” said Bradley J. Holcomb, chair of the Institute for Supply Management Manufacturing Business Survey Committee. “It’s also a very balanced report. The five supporting indexes we use: new orders, production, employment, supplier deliveries and inventories all point in the right direction.”

Of the 18 industries the PMI tracks, computer and electronics products was one of three industries that contracted in February. “That industry has been under pressure for some time, and we see this as indicative of the way the sector is changing,” Holcomb said. “The computer industry in moving to tablets and pocket-sized devices, and IT is feeling the effect of reduced government spending.”

Overall, though, the February reading reflects the highest PMI since June 2011, when the index registered 55.8 percent. New orders registered 57.8 percent, an increase of 4.5 percent over January’s reading of 53.3 percent, indicating growth in new orders for the second consecutive month. In addition, the backlog of orders, exports and imports all grew in February relative to January.

Although the March 1 release of the PMI coincided with the US government’s deadline for automatic spending cuts, Holcomb doesn’t believe sequestration will have a big effect in the next few months. “I don’t expect the manufacturing sector is going to see that much of an impact—we’ve seen some reduction in government and defense spending but if anything, sequestration will show up in the services sector more so than manufacturing.”

For the overall economy, the PMI indicates growth for the 45th consecutive month. “The past relationship between the PMI and the overall economy indicates that the average PMI for January and February (53.7 percent) corresponds to a 3.6 percent increase in real gross domestic product (GDP) on an annualized basis,” Holcomb said. “In addition, if the PMI for February (54.2 percent) is annualized, it corresponds to a 3.7 percent increase in real GDP annually.”

The overall tone of the report, Holcomb said, is upbeat. “The number of comments we received – and we pull them from several hundred comments – have more positives than negatives.”

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