Key U.S. Factory Index Dips in February, but Still Shows Expansion

U.S. manufacturing activity eased in February, as the Institute for Supply Management's manufacturing index dipped to 56.5 from 58.4 in January. Even with the dip, though, the sector showed growth for the seventh straight month.

A Bloomberg News survey had expected the index to rise to dip to 57.5 in February after jumping more than three points to 58.4 in January. The index totaled 54.9 in December and 53.7 in November. Readings above 50 indicate an expansion; under 50, a contraction. Prior to the seven-month push above 50, the manufacturing index had been below 50 for about two years.

However, the closely watched news orders component -- an indicator of future demand - fell substantially to 59.5 in February from 65.9 in January.

Further, two of four other key index components also fell in February. The production index fell to 58.4% from 66.2%, and the prices paid index fell to 67.0% from 70.0%. Meanwhile, the employment index rose to 56.1% from 53.3%; the inventories index increased to 47.3% from 46.5%.

Norbert J. Ore, chairman of the ISM's Manufacturing Business Survey Committee, said the encouraging data points remain the top-line index, which still shows an expansion, and the employment component, which is indicating increased hiring.

"The manufacturing sector grew for the seventh consecutive month during February. While new orders and production were not as strong as they were in January, they still show significant month-over-month growth," Ore said, in a statement. Additionally, the Employment Index is very encouraging, as it is up 2.8 percentage points for the month to 56.1 percent. This is the third consecutive month of growth in the Employment Index. With these levels of activity, manufacturers are seemingly willing to hire where they have orders to support higher employment."

The bottom line for investors is that U.S. factory activity still shows an expanding sector, but the new orders decline is a concern. An indicator of future demand, should it continue to decline in the months ahead, that would be one sign that the U.S. factory activity is slowing -- a negative for the U.S. economic recovery.