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Chart and excerpts below by permission from the Institute for Supply Management ® ISM® 

Please consider the February 2023 Manufacturing ISM^® Report On Business® byTimothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee:

ISM Key Points - Emphasis Mine 

• The U.S. manufacturing sector contracted in February, as the Manufacturing PMI^® registered 47.7 percent, 0.3 percentage point higher than the reading of 47.4 percent recorded in January. “This is the fourth month of slow contraction and continuation of a downward trend that began in June 2022. Of the five subindexes that directly factor into the Manufacturing PMI^®, only one (the Inventories Index), was in growth territory, and just barely.
• For the last two months, the PMI^® has registered its lowest levels since May 2020, when the index was at 43.5 percent. Of the six biggest manufacturing industries, two (Transportation Equipment; and Petroleum & Coal Products) registered strong growth in February. The Production Index logged a third month in contraction territory. Only three of the 10 subindexes were positive for the period,” says Fiore. A reading above 50 percent indicates that the manufacturing sector is generally expanding; below 50 percent indicates that it is generally contracting.
• A Manufacturing PMI^® above 48.7 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the February Manufacturing PMI^® indicates the overall economy contracted in February for a third consecutive month after 30 straight months of expansion.
• “The past relationship between the Manufacturing PMI^® and the overall economy indicates that the February reading (47.7 percent) corresponds to a change of minus-0.3 percent in real gross domestic product (GDP) on an annualized basis,” says Fiore.

Industries in Expansion and Contraction

• Expansion: Apparel, Leather & Allied Products; Transportation Equipment; Petroleum & Coal Products; and Electrical Equipment, Appliances & Components. 
• Contraction: Printing & Related Support Activities; Paper Products; Wood Products; Textile Mills; Furniture & Related Products; Nonmetallic Mineral Products; Plastics & Rubber Products; Food, Beverage & Tobacco Products; Chemical Products; Primary Metals; Computer & Electronic Products; Fabricated Metal Products; Machinery; and Miscellaneous Manufacturing.

 Prices

• The ISM^® Prices Index registered 51.3 percent, 6.8 percentage points higher compared to the January reading of 44.5 percent, indicating raw materials prices increased in February. The index ended a four-month period in “decreasing” territory preceded by 28 straight months of “increasing” status.
• A Prices Index above 52.9 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Producer Price Index for Intermediate Materials.

There is more in the report. I put a spotlight on some of the key ideas.

The ISM is a diffusion index, signaling direction not amount. For example a firm hiring 10 workers and a firm laying off 200 workers balances out.

Diffusion indexes have issues. And there is a survival bias and a weighting bias.

Excluding the early months of the pandemic, manufacturing is at the lowest level since 2009.

The biggest disconnect from reality is inventories growing for 19 months with employment reasonably strong as everything else is in contraction. 

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