The manufacturing sector has been leading the way as the U.S. economy climbs out of the recession. U.S. manufacturing activity rose to the highest level in almost seven years in February, its 19th consecutive month of expansion. Manufacturing growth is expected to continue as new orders outpace inventories, but uncertainties remain with employment, consumer spending, and commodity price inflation.
February ISM manufacturing index
As factories increase production to meet rising demand, U.S. manufacturing in February increased at the highest rate since May of 2004, according to the Institute for Supply Management. The ISM, a nonprofit industry association based in Tempe, Ariz., publishes a monthly manufacturing index that is widely referenced as a key economic indicator. The ISM manufacturing index, also known as the factory index, increased from 60.8 in January to 61.4 in February. Readings higher than 50 percent signify growth. Economists had anticipated more modest growth in the February manufacturing index to 60.9.
U.S. manufacturing gains momentum
The manufacturing index is being driven upward by new orders and production stimulated by strong exports. The ISM’s export index rose from 62 in January to 62.5 in February. The group’s new orders index accelerated from 67.8 to 68, the strongest rate since January 2004. The ISM production index climbed from 63.5 to 66.3. The inventories index headed the opposite direction, from 52.4 in January to 48.8. The declining inventories index shows that the supply chain will require continued replenishment, which is a strong indicator for future expansion in the manufacturing sector. Manufacturers could get an additional boost in 2011 from a government program that speeds up tax depreciation for equipment purchases, an incentive included in an $858 billion tax cut bill passed in December.
Future challenges to continued expansion
As manufacturing activity accelerated in February, hiring in the sector did as well. The ISM employment index hit 64.5, rising from 61.7 in January, the highest rate since January 1973. However, inflationary pressures loom as a threat. The ISM index of prices paid by manufacturers rose to 82 from 81.5, increasing concern that rising commodity prices, as well as rising energy prices, will be passed on to consumers already dealing with rising gas prices. Continued gains in manufacturing may face a headwind because of weakening consumer spending, which rose 0.2 percent in January, the slowest rate since June and only half the growth economists were expecting.