Research Team at Nomura, notes that in the US, the Institute for Supply Management (ISM) reported that its headline manufacturing index increased by 1.3pts to 49.5 in February, above expectations (Nomura: 48.2, Consensus: 48.5).
Key Quotes
“With the index in contraction territory (below 50) for five consecutive months, it is likely that activity in the manufacturing sector continued to contract in February, just not as much as before, with the index at its highest level since September.
Indeed, “hard” data on the industrial sector in January, such as industrial production and durable goods orders, beat expectations and also provide a sign of better demand on the horizon.
In addition, prices of some industrial materials appear to have bottomed out recently as Commodity Research Bureau’s (CRB) spot price indices for metals and raw industrials stopped falling and rebounded slightly in the past few months. It appears that we may have finally seen the bottoming out of activity in the manufacturing sector. But the turnaround in activity will likely be gradual, given various headwinds still remain.
On the details of the report, the measures of current activity remained above 50 in February – the production subindex increased by 2.6pts to 52.8 and the new orders subindex was unchanged at 51.5. The backlog of orders subindex remained below 50 in February, but increased by 5.5pts to 48.5, a nine-month high. This improving demand suggests that we may continue to see a pick-up in production in the near term.
The inventories subindex ticked up by 1.5pts to 45.0 in February and has been stuck below 50 since July, suggesting that inventories continued to contract for the eighth consecutive month, and could possibly provide further drag on economic growth in Q1.
Elsewhere, the employment subindex increased by 2.6pts to 48.5 in February, still in contraction territory and indicative of weak manufacturing hiring in February. We expect the BLS to report that manufacturing employment fell 5k in the February employment report set for release on Friday, 4 March.
The new export orders and imports indexes were both in contraction territory in February. The new export orders subindex fell by 0.5pt to 46.5 (not seasonally adjusted), as slower global growth and the strong dollar probably continued to reduce demand for US goods. A published comment from a respondent in the Chemical Products sector stated that “U.S. business demand is solid; international demand is soft.”
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