Friday morning, shortly after the opening bell, the Institute of Supply Management (ISM) reported that the purchasing managers' index (PMI), which measures the economic environment within the manufacturing sector, fell 2.4 percentage points in February to 54.2%, missing expectations of a 55.8% reading. For reference, over the past 12-month period (March 2018 through February 2019), PMI has reached a high of 60.8%, a low of 54.2% and averaged 58.0%. This marks the 118th consecutive month of expansion in the overall economy and the 30th in the manufacturing sector.

This is a key economic metric as manufacturing is responsible for roughly 12% of the U.S. economy. Also, recall, anything above 50 represents expansion in the manufacturing economy while anything below 50 indicates a contraction. Additionally, according to the ISM, a PMI reading above 42.9% over time is usually indicative of an expansion of the overall economy.

On the release, Chair of the Institute for Supply Management Manufacturing Business Survey Committee, Timothy R. Fiore noted, "The past relationship between the PMI® and the overall economy indicates that the PMI® for February (54.2 percent) corresponds to a 3.3-percent increase in real gross domestic product (GDP) on an annualized basis."

In addition to the headline reading, the new orders index fell 2.7 percentage points month-over-month to 55.5% (indicating a slower rate of growth), production dropped 5.7 percentage points to 54.8%, while the employment index declined 3.2 percentage points to 52.3%. Additionally, prices for raw materials (an input for manufacturers) ticked down 0.2 percentage points to 49.4%, indicating a continued contraction, a positive for manufacturers as lower input costs can help expand margins! Additionally, the backlog of new orders advanced 2.0 percentage points to 52.3%

With this, new orders have now increased for 38 consecutive months, production has advanced for 30 consecutive months, employment has gained for 29 consecutive months and prices have fallen for the second consecutive month, while the backlog of orders has increased for the second month in a row.

Speaking on the release, Fiore added that "Production expansion continued in February, but at a slower pace compared to January. Production was not able to keep pace with customer-inventory demand and was not able to prevent a growth in backlog orders. Weather conditions causing factory shutdowns may have contributed to the weaker expansion performance."

All in, we believe the weakness indicated by the release to be well understood by investors and do not believe this points to the beginning of a trend. Furthermore we would note that on the release, the dollar weakened while the major indices made a notable move higher and Treasury yields pulled back. We believe the thinking behind this dynamic is that the weaker than expected report supports the Fed's decision to hold off on future hikes, a positive for equity prices. Additionally, the weakness in the dollar creates a dynamic in which U.S. products are more affordable abroad, another positive for equities as U.S. companies shipping internationally can be more competitive on pricing versus international competitors.

Digging deeper, of the 18 manufacturing industries tracked by ISM, 16 reported growth in February, led by Printing & Related Support Activities; Textile Mills; Computer & Electronic Products; and Electrical Equipment, Appliances & Components. Nonmetallic Mineral Products were the only industries to report a contraction last month.

Lastly, in order to help members use this report to better gauge their own investments, we want to include a few quotes from ISM survey respondents in the various manufacturing industries (pulled directly from the ISM report):

  • "Strong domestics market. Slow export markets." (Paper Products)
  • "Demand remains healthy at the beginning of 2019. However, growing concerns for what could be another round of tariffs in March are further escalating price increases of already constrained electronic components. Expect to see increased lead times and prices throughout Q1 and Q2." (Computer & Electronic Products)
  • "Strong start to the year, though weather has been a challenge." (Chemical Products)
  • "Still fairly steady with production and services." (Transportation Equipment)
  • "Economy showing general strength, especially in manufacturing. Cost pressures and tariff challenges persist but are manageable. General outlook is for stability and potential improvement in the second half of 2019." (Food, Beverage & Tobacco Products)
  • "Orders remain strong. Supplier delivery continues to be challenged on some commodities." (Machinery)
  • "Aerospace engine-related business continues to be strong. Energy and general industry-related business is flat to down." (Miscellaneous Manufacturing)
  • "Business so far this year is meeting, but not exceeding, our forecast. We are concerned about indicators showing a slight recession for the second half of the calendar year." (Fabricated Metal Products)
  • "Uncertainty of steel prices due to Section 232 tariffs on imported steel and lack of resolution of the anti-dumping trade cases." (Petroleum & Coal Products)
  • "General business conditions started to slow at the end of January, continuing through February." (Plastics and Rubber Products)

Members interested in digging even deeper can view the official release, here.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.