Manufacturing expanded for the second month in a row, buoyed by new orders and backlogs after an extended period of contraction.
The ISM index posted 52.4 in February, a slight dip from January’s unexpected high of 52.6. A score above 50 indicates expansion in the sector, while one under 50 points to contraction. These two rosy scores come after a straight year of contraction, and February is only the third score above 50 in 40 months. Prices, though, surged to their highest level since June 2022, pointing to the impact of tariffs and rising steel and aluminum costs.
The numbers indicate that manufacturers are enjoying a healthy amount of demand following a long slump that began in late 2022, after inflation peaked that summer. The new growth is consistent with a generally strong economy propped up by the AI boom and personal spending among high earners. Although tariffs made their mark in troublingly high price points for purchasing managers this month, they haven’t yet curtailed orders.
“Manufacturing’s gaining some momentum,” FHN Chief Economist Chris Low said. “That said, it’s fragile.”
New orders, backlog of orders and new export orders – all indicators of demand – logged expansion for the second month in a row. Customers’ inventories were also marked as “too low,” a good sign for demand in the next several months.
The price index’s 11.6-point leap to 70.5, its highest score since inflation peaked 44 months ago in June 2022, complicates the picture. Nearly every industry in the survey reported paying higher prices for raw materials; textile mills were the only exception.
“The price index at 70 is an eye-opener,” Low said. “If prices continue to push higher — inflation is one of the reasons manufacturing weakened in the first place.”
President Trump’s sweeping tariffs have weighed heavily on the industry since April. February’s ISM data was compiled prior to the Supreme Court’s ruling that Trump’s use of the International Emergency Economic Powers Act to impose those levies was invalid — the President has other legal avenues to bring back tariffs, but they may be time-limited. Either way, manufacturers are now wading through a chaotic legal landscape as they sue the federal government for refunds.
The employment index ticked up 0.7 points to 48.8, with 1.4 companies reducing headcounts for every one company hiring — the workforce is still contracting, but at the slowest rate in just over a year. What happens next will depend on whether the sector as a whole continues expanding. Low said he expects that if the ISM headline index can remain above 50, employment will soon follow suit.
But that’s far from a sure bet. On top of tariff uncertainty, economists are concerned about the ramifications of the US and Israel’s war with Iran. Oil prices could skyrocket depending on how long the conflict drags out and how much damage Iran does to oil production in the region.
Evercore ISI strategist Stan Shipley said that consumers are likely to hold back on new purchases if they’re facing sticker shock at the gas pump.
“Gasoline prices rose 11 cents just yesterday. What happens when gasoline prices hit $3.50?” Shipley said. “I’m not so sure that’s a March event — that may be more of an April event.”