The Institute for Supply Management, the Tempe, Arizona-based trade group, earlier this morning reported that manufacturing activity had slowed its rate of improvement last month, with that metric coming in at a level of 52.4. True, that pace is above the line (50.0), which separates an expansionary rate in manufacturing from one that is contracting. Nevertheless, the rate of increase was well below the 54.1 pace in January, and even further below the 54.5 level that had been forecast for the just-concluded month.

Individually, the report showed that the rate of improvement in new orders (54.9 in February versus 57.6 in January) had slowed, as it had in production (55.3 versus 55.7), in employment (53.2 versus 54.3), and in backlogs (52.0 versus 52.5). Worse, manufacturing actually contracted last month in supplier deliveries and inventories. In fact, greater growth was observed in only imports, prices, and exports. The pickup in prices (from 55.5 to 61.5) could be viewed as a concern, as it may be an early signal of evolving pressure on the inflation side. 

Meanwhile, of the 18 industries chronicled, 11 are reporting growth, while four sectors, furniture and related products; nonmetallic mineral products; plastics and rubber; and electrical equipment, appliances, and components, noted contracting levels of activity. Overall, the February report was the weakest monthly showing since last November, when manufacturing registered a survey result of 52.2. Over the past year, this survey has ranged from a low of 51.4 in July to a high of 59.7 in both March and April. The average for the past 12 months has been 54.1. So clearly, this report was a step back, albeit not a major one. In all, this was the 31st straight month in which manufacturing has expanded, which corresponds quite well with the overall improvement in the economy, where the string of advances now stretches to 33 months.

As to what the individual respondents are saying, there is a general consensus that business is holding steady in chemicals, but that there are concerns about commodity prices. Also, some are concerned about the recovery on the machinery front. In paper products, the general view is that demand remains consistent-to-strong at all levels, while on the automaking front, demand is getting stronger. Finally, manufacturers note that they are busy and that customers are spending money on new equipment to accommodate mostly rising customer demands.

On balance, then, this report seems to be a modest setback in an ongoing steady expansion. However, this latest bit of weakness, along with the report earlier this morning by the Commerce Department of a lesser increase in personal income in January than in December and a listless gain in personal consumption expenditures, suggest that economists will be paying close attention to the companion Institute for Supply Management report on non-manufacturing activity, which is set for release this coming Monday morning. We expect that metric to show a modest further increase in growth. However, we caution that such an improved showing had been the forecast for this report on manufacturing activity, as well. 

At the time of this report's issuance, the author did not have positions in any of the companies mentioned.