The Institute for Supply Management’s manufacturing index for February rose to 57.7, up 1.7 points m/m, beating analyst expectations and its best showing since October 2014. On a 3 month moving average basis the index scored 56.1, up 15.4%, 3 months year on year.
The ISM manufacturing index is based on surveys of 400 purchasing managers in 20 industries. The survey is a diffusion index calculated as a percent of responses. A value of 50 is neutral, while less than 50 is contracting and greater than 50 is expansionary, (Figure 1).
New orders jumped from 60.4 to 65.1 in February, making a string of 6 months with month on month increases starting with 49.1 last August. Production and inventories edged higher as well in this encouraging report. The ISM explains that an inventory index greater than 42.8 is consistent with expansion. February’s inventory posting was 51.5, up from 48.5 last month. The difference between new orders and inventories which is considered a proxy for future production strengthened from 11.9 to 13.6. This points toward improvement in factory production for the quarter. The backlog of orders improved, increasing from 49.5 to 57.0. The Trump administrations plan to renegotiate NAFTA and possible other trade agreements coupled with potential tariffs on imports is having a positive impact on the ISM manufacturing surveys. The only sub-index of concern was the employment index which fell from 56.1 to 54.2. Manufacturing employment increased by 3,000 in February down from the 5,000 recorded in January. Overall the latest ISM manufacturing report indicates the likelihood of continues strengthening in US manufacturing.
At Gerdau we closely monitor the ISM manufacturing index since it is an excellent barometer of the present strength as well as a window on the likely short-run future of US manufacturing.