ISM Manufacturing Index Contracts for Fourth Straight Month

This article was originally written by Doug Short. From 2016-2022, it was improved upon and updated by Jill Mislinski. Starting in January 2023, AP Charts pages will be maintained by Jennifer Nash at Advisor Perspectives/VettaFi.

This morning the Institute for Supply Management published its monthly Manufacturing Report for February. The latest headline purchasing managers index (PMI) was 47.7, up 0.3 from the previous month and worse than the Investing.com forecast of 48.0. This marks the fourth consecutive month in contraction territory after a 29-month period of growth dating back to June 2020.

Here is an excerpt from the latest report:

Fiore continues, “The U.S. manufacturing sector again contracted, with the Manufacturing PMI^® improving marginally over the previous month. With Business Survey Committee panelists reporting softening new order rates over the previous nine months, the February composite index reading reflects companies continuing to slow outputs to better match demand for the first half of 2023 and prepare for growth in the second half of the year. Demand eased, with the (1) New Orders Index contracting at a slower rate, (2) New Export Orders Index still below 50 percent but continuing to improve, (3) Customers’ Inventories Index remaining at ‘too low’ levels, a positive for future production and (4) Backlog of Orders Index recovering for a third month but still in moderate contraction. Output/Consumption (measured by the Production and Employment indexes) was negative, with a combined 2.2-percentage point downward impact on the Manufacturing PMI^® calculation. The Employment Index returned to contraction after two months of expansion, and the Production Index logged a third month in contraction territory. 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. Inputs — defined as supplier deliveries, inventories, prices and imports — continue to accommodate future demand growth. The Supplier Deliveries Index indicated faster deliveries, and the Inventories Index expanded at a slower rate as panelists’ companies manage their total supply chain inventories. The Prices Index jumped back into ‘increasing’ territory after four consecutive months below 50 percent, supporting agreement between buyers and sellers to place orders in the near term.

Here is the table of PMI components.

The chart below shows the manufacturing composite series, which stretches back to 1948. The 11 recessions during this time frame are indicated along with the index value the month before the recession starts.

The ISM Manufacturing Index is a diffusion index, meaning that a reading above 50 indicates expansion in the sector and a reading below 50 indicates contraction. Therefore, the latest reading of 47.7 indicates we are in contraction territory. What sort of correlation does that have with the months before the start of recessions? Check out the red dots in the chart above.

Here is a closer look at the series beginning at the turn of the century.

Note: This commentary used the FRED USRECP series (peak through the period preceding the trough) to highlight the recessions in the charts above. For example, the NBER dates the last cycle peak as December 2007, the trough as June 2009 and the duration as 18 months. The USRECP series thus flags December 2007 as the start of the recession and May 2009 as the last month of the recession, giving us the 18-month duration. The dot for the last recession in the charts above is thus for November 2007. The "peak through the period preceding the trough" series is the one FRED uses in its monthly charts, as illustrated here.

ISM Manufacturing Index Contracts for Fourth Straight Month

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