The U.S. manufacturing sector slowed in February, with factory employment, new orders and productivity expansion rates all dipping below January levels.
February’s purchasing manager index (PMI) from the Institute for Supply Management was 54.2, a 2.4 percentage point decrease from January and the index’s lowest number since Donald Trump took office. This mid-50s result still indicates that the manufacturing sector is expanding but continues a downward trend from August’s 60.8 annual peak.
Several factors explain the slowdown in the ISM’s manufacturing index, including Trump’s trade war with China, an overall slowing of the global economy and in some cases, winter weather.
Multiple respondents to the ISM’s survey mentioned tariffs as a factor in February’s drop.
A purchasing manager from the Petroleum and Coal Products industry said their business was hurt by the uncertainty of steel prices following Trump’s 2018 steel tariffs. A Computer and Electronics purchasing manager told the ISM that prices had increased for electronic components in anticipation of a March round of tariffs, a measure that has since been put on hold by the U.S. as trade talks with China progress.
“We are seeing global weakness begin to set in,” said Lindsey Piegza, chief economist at Stifel Financial Corp. “We expect ongoing volatility there reflective of the very contentious trade environment. The best-case scenario is the hope that we reach a deal with China,” she said.
Tariffs did not stifle all manufacturing trade growth in February. The ISM’s survey showed growth in both imports and new export orders.
Imports rose in February following a three-month decline in expansion, though still came in well below expansion levels from June 2018 when Trump’s steel and aluminum tariffs first took effect.
11 of the 18 industries surveyed by the ISM did not see improvements in export orders last month. Export growth was fueled primarily by two large industries said Timothy Fiore, chair of the Institute for Supply Management Manufacturing Business Survey Committee.
The ISM’s report indicated that winter weather conditions slowed productivity for some regional manufacturers. A Chemical Products purchasing manager told the ISM that weather was a challenge this year. Several automotive manufacturers suspended factory operations in the Midwest due to cold weather in late January.
Friday’s manufacturing report came a day after the Commerce Department reported a slowdown in GDP growth in the fourth quarter of 2018. Economists say the ISM’s February result is unlikely to spark any policy changes at the Federal Reserve.
“It’s consistent with continued growth in the overall economy, but not to the point where the Fed has to tap on the breaks,” said Scott J Brown, chief economist at Raymond James & Associates. “It’s not suggesting, either, that the economy is falling apart.”
“It’s hard to discern a longer-term trend from one data point,” Piegza noted.