U.S. manufacturing activity accelerates in February
The ISM Manufacturing Index remained expansionary in February, rising moderately to 58.6 from 57.6 in January. Economists had expected a more modest increase to 58.0; a reading above 50 is indicative of growth in manufacturing activity.
After slipping for three consecutive months, the February uptick was in part supported by the easing of the omicron wave of COVID-19 and the lifting of some restrictions across parts of the country, while also reflecting the strength of the consumer sector.
Underpinning the positive outlook for manufacturing was an acceleration in new orders and a growing backlog, despite increasing production. This demand growth is particularly noteworthy as it comes despite surging raw material costs and rising prices for finished goods.
Supply shortages remain a challenge for producers as disruptions in global supply chains have proven to be more difficult to unwind than generally anticipated. Coupled with strong demand for consumer goods, production and delivery headwinds have contributed to upward pressure on prices.
At this point, it’s too soon to determine how significantly the conflict in Ukraine could impact the flow of agricultural and industrial commodities from the region. In the near term, it’s a negative consequence that pales in comparison to the human toll of the conflict.
Tight labor market conditions also remain a challenge for hiring managers. Manufacturing employment is increasing but at a slower pace. The employment subindex eased from 54.5 to 52.9 in February. The slowdown in hiring is clearly not a function of reduced demand but of the growing difficulty in finding skilled workers to meet hiring needs.
Exacerbating the challenge is the abundance of available jobs and rising wages, which has contributed to higher turnover as workers look for better opportunities. The result applies pressure on employers to compete to not only fill open slots but not lose sight of the importance of retaining their current workforce.
As COVID-19 cases decline, temperatures gradually rise across much of the country, and Americans become more mobile, it’s quite likely that a shift in consumer spending habits will emerge. Increased travel and reduced social restrictions would benefit the service sector, perhaps cooling the pace of spending growth on goods. If that occurs, it could help to alleviate the impact of shortages, allowing for some inventory restocking as supply chain conditions also improve.
Bottom line: The manufacturing sector remains on a solidly expansionary footing despite tight inventories, rising costs, supply chain challenges, and a tough hiring environment. Demand remains strong.
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