U.S. Manufacturing Expansion Nears 14-Year High

U.S. factory activity in February reached its highest level since May 2004, indicating sustained strength across all U.S. manufacturing sectors. The nation’s leading factory index, the Institute for Supply Management’s PMI, reached 60.8 percent in February, up 1.7 percentage points from January’s reading of 59.1 percent.

The February data represents the 106^th straight month of economic expansion and was fueled by the highest level of export orders since April 2011. New export orders grew by 3 percentage points to 62.8 percent in February. Any number above 50 indicates the sector is expanding. Although new orders and production declined slightly from January -- by 1.2 percent and 2.5 percent, respectively -- both readings remain robust.

“[The February PMI] is a near-record-breaking high,” said Tim Fiore, chair of the Institute for Supply Management's manufacturing business survey committee. “The best in 14 years. Although there was a slight slackening in new orders and production, the numbers are remaining well above 60.”

If there’s any downside to sustained manufacturing activity, it’s in the form of shortages. In the computer and electronic products sector, purchasing managers report that availability of electronics components, long lead times, allocation and constraints are wreaking havoc in the supply chain. Although employment in the manufacturing sector increased by 5.5 percent to 59.7 in February, many sectors report factories are still having a hard time finding skilled workers.

Manufacturers are also paying more for materials. The ISM’s prices index registered 74.2 percent in February, a 1.5 percentage point increase from the January reading of 72.7 percent, indicating higher raw materials prices for the 24th consecutive month. Price increases occurred across most industry sectors. In the electronics components sector, manufacturers are having some success passing price increases on to customers. Some price hikes are expected to slow as manufacturers ramp up capacity.

The report also showed that factories are having some difficulty keeping up with demand. The ISM’s index of order backlogs climbed to 59.8, a 13-year high; and delivery times lengthened by 2 percent in February, the second-highest level since 2010. However, suppliers were able to increase their inventory levels -- which grew 4.4 percent in February to 56.7 -- in order to meet demand.

“Suppliers made progress in responding to production demand increases, with the inventories index achieving the highest level since March 2010,” Fiore said. “Inventory growth is a direct result of increased production demand supporting new order inputs. If we can assume that customer inventories shrank enough in February, there should be enough [supplier inventory] to meet demand in the pipeline for another two to three months.”

There are a number of other factors at play that are making the supply chain less efficient than it could be, Fiore added. These, in turn, impact production. The Houston area still has some shipping problems associated with last summer's hurricanes. Land-based transportation fleets are having trouble finding drivers. "If your factory ordered 101 parts and you only receive 100, your whole production run shuts down," Fiore said. "Your entire supply chain becomes inefficient."

Nevertheless, the latest PMI extends a series of healthy readings in the survey-based measure of manufacturing that’s being fueled by improving global economies and firm business investment. The ISM’s special survey last month found that manufacturers are bullish about U.S. tax reform measures and corporate deregulation, although that has yet to show up in the PMI.

“All the data point to manufacturing’s overall health, but it’s still not juiced up through tax cuts and job growth,” Fiore said.