February 2023 ISM and S&P Global Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey of U.S. manufacturers for February 2023 contracted a bit more slowly. The PMI registered 47.7%, up 0.3 percentage point (PP) from January’s reading. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. Subindexes with the largest changes included prices paid (+6.8PP), new orders (+4.5PP), and imports (+2.1PP). 

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Activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- expanded at a marginally slower pace in February (-0.1PP, to 55.1%). Business activity (-4.1PP), employment (+4.0PP), and exports (+2.7PP) exhibited the largest changes.

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Of the industries we track, manufacturers contracted while services expanded. Respondent comments included the following:

Construction. “Activity is steady. Costs continue to escalate, eliminating any profit we had hoped for in the first and second quarters.”

 

Changes in S&P Global‘s survey headline results were broadly consistent with ISM’s. Both manufacturing reports showed contraction, and both services reports exhibited expansion. Details from S&P Global’s surveys follow --

Manufacturing. Softest decline in output for three months as supply chain conditions improve.

Key findings:
* Decrease in new sales sparks further, but slower, fall in output
* Greatest improvement in lead times since May 2009
* Selling prices rise at sharper pace despite softer uptick in costs

 

Services. Selling price inflation accelerates amid renewed upturn in output in February.

Key findings:
* Activity returns to expansion, albeit at only a slight pace
* Employment rises at fastest rate since September 2022
* Selling price inflation accelerates despite softer rise in costs

 

Commentary by Chris Williamson, S&P Global’s chief business economist:

Manufacturing. “US manufacturing remained under intense pressure in February. Although the PMI rose slightly, it continues to signal the steepest downturn outside of pandemic lockdown months since 2009.

“Moreover, some of the improvement in output could merely be attributed to faster supplier delivery times, which quickened to the greatest extent since 2009 to facilitate higher production and enable factories to work through previously placed orders. The worry is that new order inflows continue to fall sharply as many companies report disappointing sales, linked in part to a sustained trend towards cost-saving inventory reduction and low levels of confidence at their customers, both at home and abroad. None of this points to a healthy economic situation.

“There was some brighter news in that factory jobs growth picked up slightly amid reports of greater success in filling vacancies, and the improvement in supply chains helped reduce input cost inflation. However, rising wage pressures and efforts to raise margins meant average prices for goods leaving the factory gate rose sharply once again, the rate of inflation accelerating for a second straight month to hint at stubbornly high price pressures.”

 

Services. “A return to growth of US service sector business activity in February for the first time in eight months has offset a decline in manufacturing output, helping stabilize the economy and hopefully avert a downturn in the first quarter.

“The upturn was led by a revival in spending on services by consumers and improved activity in the tech sector, but was also aided by a marked cooling in the recent downturn in financial services.

“Across both services and manufacturing, jobs growth has risen to a five-month high as business confidence about the year ahead has perked up to its highest since last May, reviving further from the low-point seen last October. Clearly the gloom heading into the winter has been replaced with brighter prospects moving into the spring.

“This improving picture has, however, added to firms’ pricing power. Having fallen to a 27-month low in January, the rate of inflation for goods and services reaccelerated in February to its highest since last October as companies reported greater success in passing higher costs on to customers.”

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.