January Report: Manufacturing Economy Continues to Roar

Growth continued in January as the overall economy registered expansion for the 105th consecutive month, underpinned by January’s strong manufacturing data. Although the January Purchasing Managers’ Index (PMI) of 59.1 declined 0.2 from the previous month, it is still indicative of a robust manufacturing sector as readings above 50 indicate expansion. According to Tim Fiore, chairman of the Manufacturing Business Survey Committee at the Institute for Supply Management (ISM), the ISM Prices Index was at its highest level since 2011 and up more than any other index: 4.4 above the December 68.3 reading, according to the ISM report.

Respondents in 93% of manufacturing sectors reported increasing backlogs, according to Fiore’s Bloomberg Markets AM interview, indicating favorable conditions heading into February and March. Manufacturers realized gains in both import and export orders along with 8% average lead time growth in capital expenditures, reflecting suppliers’ diminished capacity to keep pace with demand. On the other hand, suppliers increased Deliveries by 1.9, up from 57.2 in December, allowing manufacturers to increase their Inventories by 3.8 to 52.3, again growing after December’s 48.5 reading, according to the ISM report. In turn, Customers’ Inventories also increased by 2.7 to 45.6, nearing a stage of growth but still considered too low. Exports increasing to a nearly seven-year high, according to Fiore’s Bloomberg Markets AM interview, reflects improvements in the global economy as well as slightly more favorable conversion rates for the weakened U.S. dollar. In addition, imports also reached 58.4, up 1.9, according to the ISM report, reflecting growth as well.

According to Jinman Li of Medill Reports, chief economist Louis Crandall from economics research firm Wrightson ICAP LLC said, “The upturn of the global economy” is one factor driving sector growth. Other growth factors include the Trump administration’s efforts to deregulate and the effects of the recently passed tax reform bill.

Opportunities

January’s Employment reading of 54.2 receded from December’s reading of 58.1, according to the ISM report, indicating employment within the manufacturing sector is still growing, albeit at a slower pace. Also increasing a bit more slowly than last month, New Orders decreased from December’s 67.4 to 65.4 in January and Production decreased by 0.7 to 64.5.

In an effort to better understand these employment numbers, specifically whether they are the result of staffing issues or reflect a real reduction in demand, Fiore turned to ISM survey respondents. In terms of employment, the manufacturing economy contracted by 37%, according to Fiore in the Bloomberg Markets AM interview, with much of the change attributed to food products. Leaders within that sector say the numbers reflect issues with staff recruitment and retention as well as the weather.

Prices for raw materials rose throughout all 18 sectors during the month of January with noted shortages for some products such as capacitors, electrical components, and circuits, according to the ISM report. Spiking prices and bottlenecks in the supply chain point to the possibility of accelerated inflation.

Going forward

The outlook for 2018 remains strong despite the employment and supply issues highlighted in the January ISM report. Increased demand, a strengthening U.S. dollar, and a more favorable regulatory landscape will likely continue to drive growth while manufacturers confront supply issues and face increasing prices for raw materials.

In regard to the recent stock sell-off, manufacturers still have plenty to look forward to. According to a Bloomberg report, underlying economic factors are still sound and indicative of continued economic expansion in the coming months and provide evidence to support their claim. The outlook continues to appear bright for the manufacturing sector despite recent challenges.

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