US Manufacturing activity rebounds as ISM increases to 50.7 in January

Manufacturing activity across the US rebounded in January as the ISM manufacturing index jumped above the pivotal 50 levels to register 50.7 with the December index being revised upward to 48.4 from 47.7 previously. A reading below 50 signals contraction, while any reading above 50 signals expansion. The stronger than expected January reading (expectations stood at 47.2) brings US manufacturing activity back into the expansion zone after having contracted for the first time last month after 10 consecutive months of expansion. A strong ISM seen in context of a 5.2% MoM surge in December durable goods orders hints at business investments holding up despite the ongoing troubles in the US economy.

Digging deeper into the data, we find that the increase in the headline index was primarily driven by higher exports, new orders and production. Exports index climbed to 58.5 in January from 52.5 previously, indicating sustained overseas demand despite domestic demand being hit by the ongoing housing market deterioration. New orders index still remains in the contractionary territory but rose to 49.5 from 46.9 previously while the production component of the index jumped to 55.2 from 48.6. Inventory liquidation continued for the 21st consecutive month as manufacturer’s inventories contracted again albeit at a slower pace in January. In line with the disappointing January NFP report the ISM also revealed a softening labor market as reflected by the manufacturing employment index, which declined to 47.1 from 48.7 in December. The ISM Price Index, a measure of prices paid by manufacturers, rose to 76 from 68 in December. This is not surprising, given the elevated levels of energy and food prices over the past two months.

Major industries which registered growth in January were Apparel, Leather and Allied products, Petroleum and Coal, Food, and Electrical equipment. Although the January ISM does provide some comfort it would do little to nudge the Fed’s dovish stance. Overall economic news has not been very encouraging thanks to the iffy labor market, worsening housing conditions and the ongoing dislocations in the financial markets. According to manufacturers questioned during the ISM survey, “The softness in residential construction has begun to manifest itself in commercial construction”.