Manufacturing Sector Tops Estimates In January As New Orders Climb, Prices Rise: Why It's Bad News For Inflation

The U.S. manufacturing sector showed signs of resurgence in January, buoyed by a significant increase in new orders, potentially marking the end of a prolonged contraction phase.

Data published Thursday highlighted an upward revision in the final reading of the S&P Global US Manufacturing PMI and a better-than-expected release for the ISM Manufacturing PMI.

Both assessments of manufacturing activity indicate a robust rebound in new orders. They also emphasize the rising costs of raw materials and highlight the need for close monitoring of recent disruptions in international trade.

Index	January 2024	December 2023	Notes
S&P Global Manufacturing PMI	50.7	47.4	Upwardly revised from 50.3, highest print since September 2022, first expansion since April 2023
ISM Manufacturing PMI	49.1	47.1	Tops the expected 47. New orders climb, price pressures surge

US Manufacturing Sector Recovers In January: Key Takeaways

• The S&P Global US Manufacturing PMI was revised upwards from a preliminary estimate of 50.3 to 50.7 in January 2024, up from 47.4 in December.
• This adjustment suggests a more significant improvement in manufacturing conditions than initially anticipated, marking the largest reading since September 2022 and the first sign of expansionary conditions since April 2023.
• The primary driver behind the increase in the headline figure was a renewed expansion in new orders at manufacturing firms at the year’s beginning.
• In January, confidence among goods producers soared to its highest level in 21 months, driven by marketing expenditures and capacity expansion, coupled with expectations of improved demand conditions.
• Concurrently, the Institute for Supply Management (ISM) reported that its Manufacturing PMI reached 49.1 in January, up from 47.1 in December and considerably above the forecasted 47. Despite this improvement, the reading remained below 50, indicating the 15th consecutive month of contraction.
• The ISM New Orders Index entered expansion territory at 52.5% , a significant rise of 5.5 percentage points from the seasonally adjusted figure of 47% noted in December.
• The ISM Prices Index was recorded at 52.9%, up 7.7 percentage points from the December figure of 45.2%. This increase suggests that the prices of raw materials have risen in January after eight consecutive months of declines.

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Economist Takeaways

"Manufacturers have started the year with a spring in their step,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said.

Williamson highlighted that business optimism for the year ahead has soared to its highest level since early 2022, driven by a surge in demand. New orders are increasing at a rate not observed in over a year and a half, with a particularly sharp improvement in consumer goods as households start to feel the benefits of easing inflation and more relaxed financial conditions.

This positive outlook is moderated by indications of rising factory prices due to supply delays, often related to adverse weather and recent disruptions in global shipping.

“Some renewed upward pressure on consumer prices could therefore appear in the months ahead if these supply-linked inflationary trends persist," Williamson said.

Timothy R. Fiore, chair of the ISM Manufacturing Business Survey Committee, said: “Demand remains soft but shows signs of improvement, and production execution has stabilized since December. Panelists’ companies are continuously managing outputs, material inputs, and labor costs.”

The Materials Select Sector SPDR Fund XLB was trading 0.5% higher at the time of publication.

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