A Mixed Message on Manufacturing
The recent data on manufacturing paint a mixed picture of the health of the sector. The industrial production index for manufacturing in January fell by 0.7 percent, reflecting weakness across a broad range of industries but with a particularly steep drop in the motor vehicle sector (-6.0 percent). On a year-over-year basis, industrial production in manufacturing expanded by 1.8 percent, whereas the motor vehicle sector declined by 7.6 percent.
The advanced report on durable goods showed a marked decline in new orders in January (-7.8 percent), but shipments held steady. Two-thirds of the decline in new orders is accounted for by a steep drop in nondefense aircraft orders (-60.3 percent)—a particularly volatile component of the new orders series. These data also show a relatively weak performance in the motor vehicle sector, with declines in shipments and orders in January of 4.4 percent and 5.1 percent, respectively.
On the positive side, the ISM report on February manufacturing activity offers some encouragement. The ISM composite index for manufacturing registered a rebound in February to 52.3, indicating an improvement from January’s reading of 49.3. The ISM uses a diffusion index, and a level above 50 indicates that the sector is expanding, while a value below 50 indicates contraction. Both the new orders and production components of the index increased as well in February.
The bottom line is that manufacturing activity was clearly soft in January, and there is conflicting information regarding the future path of manufacturing—the ISM report offers some positive news, but the new orders information from the durable goods report suggests some weakness going forward.