The U.S. economy continued to expand at a rapid clip in February, with manufacturing staging an unexpectedly strong comeback that more than made up for a downtick in activity in the services sector.
The “flash” U.S. manufacturing purchasing managers index from S&P Global rose to a 17-month high of 51.5, boosted by the strongest increase in new orders in more than a year and a half. The index tracking manufacturing output rose to the highest level in 10 months.
The services PMI dipped to 51.3, the lowest level in three months, but still indicated expansion.
S&P Global said the composite index, which combines both surveys, slid to the lowest level in two months but still indicated a growing economy.
The “flash” reports are preliminary estimates based on about 85 percent of the responses of businesses to the monthly S&P surveys.
“The early PMI data for February indicate that the US economy continued to expand midway through the first quarter, pointing to annualized GDP growth in the region of 2 percent,” said S&P economist Chris Williamson. “Although service sector growth cooled slightly, manufacturing staged a welcome return to growth, with factory output growing at the fastest rate for ten months.”
The Federal Reserve thinks the longer run average for annual economic growth in the U.S. will be just 1.8 percent so the PMI numbers indicate that the economy is growing faster than normal. The latest summary of economic projections from Fed officials, released after the central bank’s December meeting, projected the economy would grow just 1.4 percent this year.
The faster-than-expected growth rate and robust recovery in manufacturing, combined with data showing the labor market remains very strong, calls into doubt the need for the Federal Reserve to cut rates this year.
“Service sector growth has slipped slightly, however, as has confidence in the year-ahead outlook among service providers, in part reflecting some pull back in the extent to which interest rates are expected to fall in 2024. It is nevertheless welcome news that both manufacturing and services are expanding again for the first time in three months,” Williamson said.
Price pressures remain subdued for now, according to Williamson. Selling prices picked up in February but remain low by recent standards and consistent with the Fed hitting its two percent target, Williamson added.