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United States PMI January 2019

United States: ISM manufacturing index regains steam in January as domestic demand recovers

The U.S. manufacturing sector recovered in January after experiencing the sharpest slowdown in a decade in December. The Institute for Supply Management (ISM) manufacturing index rose from a revised 54.3 in December (previously reported: 54.1) to 56.6 in January, beating analysts’ expectations of 54.0. As a result, the index remained above the 50-point threshold that separates expansion from contraction in the U.S. manufacturing sector, where it has been for 29 consecutive months.

The pick-up in the index observed in January came mainly on the back of a recovery of the output and new orders indexes, which both made strong gains in the month. Interestingly, the new export order index declined slightly in the month, indicating that the domestic economy led the demand surge—in contrast to in December when weaker domestic demand caused the overall index to plunge. Furthermore, backlogs of work only increased marginally in January, while employment growth slightly softened. This indicates that manufacturers appear in a good position to accommodate robust production growth, although the tight labor market is making qualified workers scarcer.

On the supply front, all indicators point, to less strain on firms’ supply chains in January. Notably, supplier delivery times continued to lengthen, but at a more moderate pace than in December, while conversely manufacturers’ input inventories grew at a faster rate in the month. Most importantly, the price of raw materials fell for the first time in nearly three years in January, a significant change from just a few months ago when input cost inflation was stoked by tariff effects combined with exceptionally strong demand. Import growth meanwhile accelerated somewhat, while customers’ inventories continued to deplete at a sharp rate.

Commenting on this month’s release, Fotios Raptis, senior economist at TD Economics, noted:

“A rebound in manufacturing activity in January is a welcome development, and suggests that a healthy expansion is likely on offer once again in the first quarter of 2019. That said, survey respondents are sending mixed signals about their outlook. Some industries see improving demand after a weak end of year, while others anticipate slower growth in the months ahead. Surprisingly, tariffs were less of a concern this time around, and there were no comments about labor shortages”. Looking forward, he noted that “slowing foreign demand is likely to remain a headwind to U.S. manufacturers through the first half of 2019. That said, trade talks between the U.S. and China could yet prove fruitful this quarter, and if a deal is reached should help alleviate much of economic policy uncertainty while also working to restore confidence in the global economy.”

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