February 2013 ISM Reports

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Manufacturing expanded modestly in February, with the Institute for Supply Management’s (ISM) PMI registering 54.2 percent, an increase of 1.1 percentage points from January's seasonally adjusted reading of 53.1 percent (50 percent is the breakpoint between contraction and expansion). “This month's reading reflects the highest PMI since June 2011, when the index registered 55.8 percent,” observed Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee. Respondent quotes were generally upbeat, including one Wood Products respondent who said, "Demand indicators are robust. Supply is constrained. Pricing is escalating."

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The pace of growth in the service sector also picked up slightly in February. The non-manufacturing index (now known simply as the “NMI”) registered 56.0 percent, 0.8 percentage point higher than January’s 55.2 percent. “This month's reading also reflects the highest NMI since February 2012, when the index registered 56.1 percent,” said Anthony Nieves, chair of ISM’s Non-manufacturing Business Survey Committee. “The majority of respondents' comments reflect a growing optimism about the trend of the economy and overall business conditions.” For example, one Real Estate, Rental & Leasing respondent observed that the "construction market [is] showing some positive signs." That was confirmed by a Construction respondent who said, "Business is picking up; more projects to bid and things are improving." 

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Wood Products reported a pickup in activity, although the increase was apparently limited to the pace of production. Paper Products expanded as well, thanks to new and backlogged orders, production and employment. Real Estate expanded, although the contributing changes were limited to new and backlogged orders. Construction exhibited growth across most sub-indices, while Ag & Forestry contracted despite expansion among backlogged and new export orders, and imports.

Prices increased for a variety of commodities, including diesel and gasoline; lumber (including pine, plywood and treated); corrugated boxes/packaging; paper; natural gas; oil and caustic soda. Copy paper was the only relevant commodity down in price. No relevant commodities were in short supply.

Along with the overall upbeat note in these reports, we see a couple of items that sound a cautionary note and bear watching: First, input prices are rising too quickly (both indices are above 60). Second, employment -- while still solidly positive in both indices -- is increasing at a decreasing pace.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.