United States: Manufacturing activity continues to support growth in January
Manufacturing conditions in the U.S. economy remained upbeat at the start of the year, buttressed by robust demand and soaring production levels. The Institute for Supply Management (ISM) manufacturing index dipped only slightly to 59.1 in January from 59.7 in December, a less pronounced decline than the drop to 58.6 expected by market analysts. The index still lies comfortably above the 50-point threshold that separates expansion from contraction in the U.S. manufacturing sector.
The small sequential decline in January’s headline figure was consistent with other surveys of the manufacturing sector, which had all pointed to a slight moderation in growth dynamics in the manufacturing sector in January. Nonetheless, strengths continued to abound in the monthly report, with production and new order growth easing slightly from the previous month but remaining very robust nonetheless. Inventories accumulated through the month as producers intensified purchasing activities to keep up with robust demand and following a drawdown from stocks in late 2017. Backlogs of orders also mounted at a faster pace than in the previous month, indicating that producers struggled to meet new demand, particularly from abroad amid a further weakening of the dollar.
The report’s weak link was employment growth, with the employment index losing 3.9 points, as it fell to 54.2 on a 100-point scale. Although the figure still suggests some expansion in hiring activity, it also signals that firms are struggling to find qualified staff amid a nearly depleted pool of available workers. Difficulties in expanding firms’ staffing levels likely fueled higher compensation in the month, which also aligns with government data and indicates wage inflation is accelerating early in the year. This likely fed into higher input costs, with the ISM’s inflation component at a cycle high in January.
The healthy momentum seen in the manufacturing sector throughout 2017 seems to remain intact early this year, with no apparent signs of a meaningful deceleration on the horizon. A supportive dollar, solid global demand and the positive effects from the tax reform should continue fueling manufacturing activity, which in turn will keep the economy running at full speed. That said, a string of reports—including January’s manufacturing ISM—have led to concerns that inflation may be just around the corner, which could further temper market sentiment and cause the Federal Reserve to accelerate its policy rate normalization.