Factories No Longer in Freefall Point to U.S. Services Gain

  • Half of manufacturing industries in survey grew in February
  • ISM survey chairman says manufacturing may have found bottom

Now that manufacturing is finding a floor, the U.S. economy may get the much-needed pickup in services that will prevent the ceiling from caving in.

The factory slump that began more than a year ago and accelerated toward the end of 2015 showed signs of easing February, according to figures Tuesday from the Tempe, Arizona-based Institute for Supply Management. Gains in orders and production just about made up for sustained cutbacks in inventories.

Improving demand in the U.S. is helping overcome the hurdles of a strong dollar and weaker growth abroad that have hurt exports by American manufacturers, which account for about 12 percent of the economy. As a strengthening job market braces U.S. consumers, gains in household spending are likely to prop up the rest and keep the expansion that began in 2009 on track. 

“Forming a base and getting to rebound is the first step in the manufacturing sector healing,” said Tom Simons, a money-market economist at Jefferies LLC in New York, who correctly forecast the improvement in the factory index. “It’s certainly encouraging to see the manufacturing start to turn it around because that suggests that services can do better at some point as well.”

The ISM’s factory index climbed to 49.5 last month, the highest since September, from 48.2 in January. While the reading was just shy of 50, the dividing line between contraction and expansion, February’s improvement corroborates other industry reports that suggest manufacturing is gaining traction.

For the first time since August, at least half of the industries expanded in February, with 9 of 18 showing growth. Makers of wood products, textiles, furniture and chemicals were among the top performers. The list of comments by respondents also skewed to the positive, with a purchasing manager at a chemical company highlighting the difference between solid demand in the U.S. and softer growth internationally.

The report showed new orders grew in February for a second month and production expanded at the fastest pace in six months. Holding back the top-line reading were reductions in employment and stockpiles. Without the contraction in inventories, the manufacturing gauge would have been over 50, Bradley Holcomb, chairman of the ISM’s factory survey, said in a conference call.

Twelve of 18 manufacturing industries reported an increase in bookings, the most since October 2014.

“Perhaps we found bottom and a turning point,” said Holcomb. “I think we’re set up for things in the right direction, and I say that largely on the basis of new orders.”

The group’s services index, due Thursday, covers the rest of the economy, making it the more important measure of growth. In January, the gauge barely signaled the expansion remained in tact, sinking to the lowest level in almost two years. 

Any rebound in services would help ease concern that the world’s largest economy was tipping into a recession.

One non-manufacturing industry is showing signs of life. Spending on all construction projects, private and public, rose 1.5 percent in January, the most since May, according to data from the Commerce Department Tuesday. Government outlays jumped 4.5 percent, the most since October 2014, led by a surge in work on highways and streets.

Those figures prompted economists at Goldman Sachs Group Inc. in New York to raise their tracking estimate of first-quarter gross domestic product to a 2.3 percent advance at an annual rate from 2.2 percent. The economy expanded at a 1 percent pace in the last three months of 2015.

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