WASHINGTON- US factory activity unexpectedly rebounded in January after contracting for five straight months amid a surge in new orders, offering hope that a prolonged slump in business investment has probably bottomed out.
A rebound in business investment is critical to keeping the longest economic expansion in history, now in its 11th year, on track amid signs of fatigue in consumer spending. The improvement in manufacturing reported by the Institute for Supply Management (ISM) Monday likely reflected an ebb in trade tensions between the United States and China.
But manufacturing, which accounts for 11 percent of the US economy, is not out of the woods. Boeing last month suspended production of its troubled 737 MAX jetliner, grounded last March following two fatal crashes. The coronavirus, which has killed hundreds in China and infected thousands globally, could disrupt supply chains, especially for electronics producers.
“A first step toward de-escalation in the trade war certainly helped,” said Tim Quinlan, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. “We are only beginning to understand the potential effects of the coronavirus outbreak and what it means for supply chains.”
The ISM said its index of national factory activity increased to a reading of 50.9 last month, the highest level since July, from an upwardly revised 47.8 in December.
A reading above 50 indicates expansion in the manufacturing sector. The ISM index had held below the 50 threshold for five straight months. Economists polled by Reuters had forecast the index rising to 48.5 in January from the previously reported 47.2 in December.
Washington and Beijing signed a Phase 1 trade deal last month. The deal, however, left in place US tariffs on $360 billion of Chinese imports, about two-thirds of the total, which economists say will remain a constraint on manufacturing.
The ISM said “global trade remains a cross-industry issue, but many respondents were positive for the first time in several months.” The survey’s forward-looking new orders sub-index jumped to a reading of 52.0 last month, the highest since May, from a revised 47.6 in December.
A measure of exports orders raced to the highest level since September 2018, while a gauge of imports touched levels not seen in 11 months. Manufacturers also reported paying more for raw materials and other inputs. The survey’s measure of prices paid hit its highest level in 10 months, suggesting some building up of inflation pressures at the factory level.
The Federal Reserve held interest rates unchanged last week and could keep monetary policy on hold at least through this year. Fed Chair Jerome Powell told reporters that while manufacturing PMIs in many jurisdictions had moved up off of their lows, “I would just say none of this is assured.”
The 18-month-long US-China trade war has pressured business confidence and undercut capital expenditure. Business investment contracted in the fourth quarter for the third straight quarter, the longest such stretch since 2009.
The ISM’s factory employment index rose to 46.6 last month from a revised reading of 45.2 in December. It, however, held below the 50 level, suggesting manufacturing payrolls could remain weak. Factory employment increased by 46,000 jobs in 2019 after rising 264,000 in 2018.
The dollar rose against a basket of currencies, while US Treasury prices fell. Stocks on Wall Street were trading higher.
The rebound in ISM’s closely watched national survey follows a series of mixed readings on the manufacturing sector at the regional level. A purchasing manager survey tracking the Chicago region slumped to a four-year low in January. — Reuters
