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A Robust January For Manufacturing Quiets The Naysayers

It seems like ages ago that it was all doom and gloom for American manufacturing. But it was just a month ago, after the Institute for Supply Management’s Purchasing Managers Index (PMI) showed a steep December decline, to 54.3%, from November’s 58.8%. Coming amidst rising predictions of an impending U.S. recession, and representing the index’s lowest point since April 2016, it was excellent fodder for the doomsayers. That gloom led to a 660 point drop in the Dow Jones Industrial Average on January 3.

Now January’s numbers are in, and the PMI has bounced back up to 56.6%. Coupled with the month’s strong jobs report from the Labor Department, which showed the economy adding 304,000 new jobs in the month, this indicates strength in both the general economy and the industrial sector.

For manufacturing in particular, most economic indicators have turned solidly positive. Another key measure of the sector’s health, the National Electric Manufacturers Association’s Electroindustry Business Conditions Index, had been in contraction territory below 50% since last September, but it gained seven points to reach 53.3% in January. Manufacturing jobs growth was at a five-month low with over 13,000 sector jobs added in the first month of 2019, but this comes after a banner year of job growth, with 284,000 manufacturing jobs added – the largest gain in 20 years.

More good news was contained in the details of the PMI report. New Orders and Production were both roaring in January, coming in at 58.2% and 60.5%, respectively. Customers’ Inventories increased slightly, from 41.7% to 42.8%, but remain in too-low territory that indicate continued strong demand for manufactured goods.

Timothy R. Fiore, CPSM, C.P.M., Chair of the ISM Manufacturing Business Survey Committee, who issued the PMI report, had this to say in the ISM’s press release:

Comments from the panel reflect continued expanding business strength, supported by strong demand and output. Demand expansion improved with the New Orders Index reading returning to the high 50s, the Customers’ Inventories Index remaining too low, and the Backlog of Orders remaining at a near-zero-expansion level. Consumption continued to strengthen, with production expanding strongly and employment continuing to expand at previous-month levels. Inputs — expressed as supplier deliveries, inventories and imports — continued to improve, but are negative to PMI expansion. Inputs reflect an easing business environment, confirmed by Prices Index contraction. “Exports continue to expand, but at the lowest level since the fourth quarter of 2016. Prices contracted for the first time since the first quarter of 2016. The manufacturing sector continues to expand, reversing December’s weak expansion, but inputs and prices indicate fundamental changes in supply chain constraints.”

Not all indicators were positive. ISM’s Chicago Business Barometer, widely viewed as an indicator of the nation’s overall economic health, fell 7.1 points from December’s adjusted 63.8% to 56.7%. As with last month’s PMI, that number remains in growth territory, but the large decrease is troubling. Also worrying are the significant declines in the Chicago Business Barometer’s Production and New Orders categories.

Also, part of the economic threat to the industrial sector from the beginning of 2019 remains, though it’s been delayed. There has been no resolution to the U.S.-China trade dispute, and the tariff increase from 10% to 25% on $200 billion worth of Chinese goods, originally slated for January 1 but delayed to March 2, will loom large this month. Failure to resolve this problem could lead to a tremendous drag not just on manufacturing, but on the U.S. economy as a whole.

Still, the overall picture looks markedly brighter than just a month ago. American manufacturing has shown itself to be remarkably resilient despite our turbulent times.

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