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Manufacturing sector shrinks again in February amid falling demand

REAL ECONOMY BLOG | March 01, 2023

Authored by RSM US LLP

The manufacturing sector contracted for the third straight month as higher borrowing costs continued to affect demand.

The Institute for Supply Management’s manufacturing index in February was 47.7, remaining below the long-term breakeven point of 48.7. An index above 48.7 indicates an economic expansion and vice versa.

The sector’s contraction was driven by lower production activity and a continued decline in new orders. Lower demand also kept the backlog of orders and employment in negative territory in February.

ISM manufacturing index

Despite the softer demand pressure on prices, prices paid on manufacturing goods inched up on the month after falling for four straight months.

That was somewhat in line with the expectations that manufacturing goods inflation would most likely come back when the imbalance between supply and demand eased back to normal.

The data added more reasons to believe that inflation will remain sticky as the decline in goods inflation might not last.

While production and demand have clearly been underwater in the past three months, it is too soon to make a call on whether the sector is in a recession or not. The manufacturing sector continued to add thousands of net jobs during the same period.

According to ISM, “panelists’ companies continue to indicate that they will not substantially reduce head counts, as sentiment is positive about the second half of the year, though slightly less so compared to January.”

But given the fact that spending on manufacturing goods is often highly sensitive to rate hikes, it is unlikely that the sector has reached its bottom as the recent rebound in inflation has required more rate hikes.

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This article was written by Tuan Nguyen and originally appeared on 2023-03-01.
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