Supply Chain More Optimistic About Q2 Component Demand
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Although the U.S. manufacturing industry contracted for the fifth consecutive month in February there are indications that the industry is poised to return to growth in the near term.
The Institute for Supply Management’s PMI, a leading indicator of U.S. manufacturing activity, hovered just below 50 in February at 49.5, up 1.3 percent from 48.2 the prior month. Several of the PMI’s supporting indexes, however, increased to above 50, the line of demarcation between growth and contraction.
U.S. factory production increased by 2.6 percent to reach 52.8 in February while new orders remained stable at 51.5. “Things are moving in the right direction,” said Bradley Holcomb, chairman of the ISM’s Manufacturing Business Survey Committee. “Twelve out of the 15 industries we track are reporting growth in new orders and production also is up nicely.” Additionally, backlog is contracting at a slower pace than last month [increasing 5.5 percent to hit 48.5] meaning production will eventually need to ramp up.
The U.S. manufacturing industry has been struggling in recent months as a strong dollar, depressed oil prices and soft foreign market demand has kept output low. But the pace of contraction is beginning to slow in the ISM’s inventory, employment and pricing indices. For the first time in 15 months the ISM’s price index ticked up; prices increased by 5 percent in February to reach 38.5. “This could be an inflection point,” said Holcomb. Price hikes usually indicate increasing demand or decreasing supply. “That’s another indication that the [sluggish manufacturing market] has bottomed out,” Holcomb said.
The most positive data is coming from manufacturer panelists who were generally upbeat about February. “Mobility spend is up,” said a manager in the computer and electronics products market. Another manufacturer said it wasn’t seeing any volatility from oil prices and that business remains strong. Growth projections for the balance of 2016 haven’t changed, the manufacturer added.
There’s nothing on the horizon that would cause momentum to stall, Holcomb said. Factory employment increased 2.6 percent to reach 48.5. “Momentum is moving in a positive direction and as I look at the plot of the PMI over several years I see a pattern,” he added. During the post-recession period in 2012 the PMI looked like a two humped camel: it would grow for a month or two and then decline. “I think we are in the process of building that second hump,” Holcomb concluded.
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