Weak global demand and stronger dollar still impact US manufacturing sector

The US ISM manufacturing index improved to a five-month high of 49.5 in February. However, the factory sector continues to be impacted by weak global demand and the strong dollar, despite the improvement. On the positive side, manufacturing is not getting weaker, but there is no projection for a significant recovery soon either.

The main details of the report were largely positive. The forward-looking new orders index continued to be at 51.5, while the production index rebounded to 52.8 from 52. The employment index recovered from 45.9 to 48.5. This index has been giving subdued signals in the past few months, without an equivalent drop in actual factory payrolls.

Global demand continues to be weak, and even if the rate of dollar appreciation is likely to be slow, the almost 20% gain since mid-2014 will remain as a headwind for most of 2016. However, there are not many signs of a larger collapse that will jeopardize the economy. The ISM index, during the previous recessions, would usually drop much below 46.

Meanwhile, the nation posted a strong growth in construction spending, which grew 1.5% m/m in January, while the gain in December was revised up to 0.6% m/m. The strong growth in construction spending and the moderate recovery in the ISM index indicate that the economy will growth at a strong annualized rate of 2.5% in Q1.