Manufacturing sector activity took a step back in February on weaker new order growth and slowing production. The ISM Manufacturing Index declined to 50.1 in February, as disruptions to global supply chains and concerns about the spread of the coronavirus continued to grow. That result fell a bit short of expectations. The index had clocked in at 50.9 in January.
Among the more troubling elements in the report was a moderate decline in New Orders, which dipped from 52.0 in January to 49.8 in February. New orders are a key forward-looking indicator for the strength of manufacturing. Production also slowed from 54.3 to 50.3, slowing but still expanding narrowly for the month.
The ISM manufacturing index had been in negative territory for five consecutive months to end 2019 as the trade war with China and risk to the economy weighed heavily on the sector. January brought a return to moderate growth in the nation’s factories, only to be hit by the severe coronavirus outbreak that idled factories in a key region of China.
At the epicenter of the outbreak, Chinese PMI measures fell precipitously in February. The Caixin/Markit Manufacturing Purchasing Managers’ Index released yesterday fell sharply into contractionary territory at 40.3 for the month, marking its weakest reading on record. While the U.S. manufacturing sector should be insulated from the worst of the impact of the sharp decline in China, the ripple effect is still impacting global supply chains. The longer the disruption, the greater the impact on domestic manufacturers reliant upon Chinese suppliers.
The U.S. economy had been showing signs of cyclical improvement in recent months. The coronavirus outbreak and related precautionary measures will have a negative impact on that outlook, on both the supply and demand sides of the economy. Both the formal policies intended to slow its spread and more cautionary consumer behavior are certain to take a bite out of growth.
Even so, the consensus view is that the U.S. economy should sustain growth through the first quarter barring an extreme outbreak of the coronavirus here. For now, the economy appears to be strong enough to grind forward.
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