At the start of the year, the theme for the U.S. economy, especially for the manufacturing sector, was that demand returning is critical to a “soft landing.”
The Manufacturing ISM® Report On Business® data for January offered evidence that demand is approaching the runway — or at least asking for clearance. The composite PMI® of 49.1 percent exceeded expectations, powered by the New Orders Index ending a 16-month stay in contraction territory by registering 52.5 percent, its highest reading since May 2022.
New Orders is one of four subindexes that gauge demand, and three of them had positive readings in January, Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® Manufacturing Business Survey Committee, told a conference call of reporters after the data was released on Thursday.
PMI® Insights, Straight From the Sources
The Manufacturing PMI® has been in contraction territory for 15 consecutive months, but “early indications are that (the sector is) ready to begin its next growth cycle,” Fiore said. “But it’s early.”
Among the other demand yardsticks:
- The Customers’ Inventories Index, which measures the amount of product on shelves, fell to 43.7 percent — technically in contraction, but a lower reading is considered a good sign for future new orders and production.
- The Backlog of Orders Index (44.7 percent) remained in contraction and was down compared to December, despite new orders growth. That’s a sign that production was stable; Fiore said he doesn’t expect backlogs to expand until after the first quarter.
- The New Export Orders Index (45.2 percent) was the only downer, signaling continuing buying sluggishness in such markets as Europe and China. Though exports account for less than 20 percent of American manufacturing output, a positive New Orders Index reading with little help from overseas speaks to the strength of the U.S. economy, Fiore said.
Also, the Production Index, which had been in contraction in 10 of the previous 13 months, moved into expansion at 50.4 percent. Add it all up, and Fiore believes the Manufacturing PMI® remains on track to traverse in expansion territory sometime this spring.
“I’m still bullish on that,” he said. “Some of these numbers were a surprise to me, and I know they were for many in the economic community. But when the sector overperforms, it’s definitely appreciated. It’s the beginning of something, and other things need to happen for it to prove out.”
Fiore added, “But it looks like the manufacturing sector is finally waking up and is getting ready to start running.”
As for what needs to improve, the Employment Index remained in contraction at 47.1 percent, but Fiore said companies are still right-sizing their head counts, and they aren’t going to stampede to add staff until a demand increase is more definitive. For every Business Survey Committee respondent comment about adding workers in January, there were 1.3 about reducing staff, he added.
Fiore said, “There’s been some momentum since the (U.S. Federal Reserve) meeting in December,” where chair Jerome Powell announced interest rates would stay put, with cuts possible this year. However, he added, “There’s not high-scale euphoria that happy days are here again yet. There’s not been dramatic growth that would require a dramatic increase in employment. It’s going to be phased in over time.”
At the same time, manufacturer inventories (up from 43.9 to 46.2) and customer inventories (down from 48.1 43.7) remain in contraction. If there is a further pickup in demand, production would need to accelerate to meet sales needs given reduced stockpiles.— Chad Moutray (@chadmoutray) February 1, 2024
The Prices Index returned to expansion (or “increasing”) territory for the first time in nine months, hitting 52.9 percent. That’s largely the result of the calendar turn bringing new pricing agreements between companies and suppliers. Such commodities as metals and plastics have been on the rise, but Fiore said he does not expect the Prices Index to increase dramatically in the coming months.
So, with many of the fundamentals promising — and Chemical Products, now the largest manufacturing industry by contribution to gross domestic product, posting a PMI® of above 50 percent — anticipation of overall sector growth is heating up.
“It’s as if the sector has been practicing over the airport for a few months and is (ready to land),” Fiore said. “But it’s still touch and go, a little slow. It’s not a fighter jet that’s coming in. It’s more like a cargo flight.”
The Report On Business® roundup:
Barron’s: ISM Manufacturing Index Shows Signs of Improvement. “Things have been contracting for a very long time. It’s the longest consecutive contraction streak in decades. … It isn’t a perfect reading, but there are signs of improvement. Manufacturing demand was weak in 2023. Manufacturers are hoping for a stronger 2024.”
Bloomberg: U.S. Factory Gauge Climbs to Highest Since 2022 on Orders Growth. “The ISM’s survey pointed to remaining hurdles for a recovery in US manufacturing. While domestic demand has been steady, the (New Export Orders Index) showed overseas customers are pulling back. … Price pressures also bubbled up in January.”
CNBC: ISM Manufacturing Reaches 49.1 for 15th Consecutive Print Under 50. “It really is something incredible to watch to see that (the Prices Index) jump the way it has,” analyst Rick Santelli said. “I know it’s not the favorite inflation indicator, nor is CPI (the U.S. consumer price index), but some metrics outside of PCE (the personal consumption expenditures price index) are running a bit warmer than the Fed may like.”
Mace News: Manufacturing in Contraction for 15th Straight Month but Picks Up Toward Growth on Unexpected Jump in New Orders, Stable Output. “(T)he jump in new orders subindex in the January survey was a surprise and new orders may face headwinds in February, and (Fiore said) he needs to see a few more months of data to confirm whether this category is on a recovery track.”
today's ISM manufacturing PMIs look good -- the upswing in measured activity is led by an even bigger upswing in new orders -- but wow is it great to see "Transportation Equipment" say "the semiconductor supply chain is fine now" pic.twitter.com/lQsTmlat3A— Alex Williams (@vebaccount) February 1, 2024
MarketWatch: ISM Factory Index Improves but Stays in Contraction Territory for 15th Straight Month. “Economists surveyed by The Wall Street Journal had forecast the index to rise to 47.2 percent. … Regional manufacturing surveys were very weak in January, but the national ISM index showed some signs of life. Economists said it will take time before the sector stabilizes even if the Federal Reserve cuts interest rates.”
Reuters: U.S. Manufacturing Sector on Cusp of Recovery in January. “The rise (in the Supplier Deliveries Index, to 49.1 percent) could be reflecting delays caused by winter storms. Attacks on cargo vessels in the Red Sea by Yemen-based Houthi, which have forced shipping companies to avoid the route through the Suez Canal, could also disrupt supply chains. Factory employment remained subdued. That is, however, unlikely to impact expectations for solid job growth in January.”
ISM’s Services PMI® will be unveiled on Monday, and the Hospital PMI® on Wednesday. For the most up-to-date content on the reports under the ISM® Report On Business® umbrella, use #ISMPMI on X, formerly known as Twitter.