The pace of U.S. factory activity surged in December, propelling the manufacturing industry to its best year since 2004. The Institute for Supply Management’s leading index, the PMI, grew by 1.5 percent to reach 59.7 percent in December. That brought 2017 to an average PMI of 57.6 percent.
“This is the second highest number in seven years—the only higher number was post-hurricanes,” said Tim Fiore, chair of the ISM’s manufacturing services business committee. “At that time growth was driven by supplier deliveries. That's been replaced by new orders. [December’s index] is a ‘cleaner’ PMI than we have seen in a long time.”
New orders led the end-of-year surge, increasing by 5.4 percentage points to reach 69.4 percent. “That’s the highest we’ve seen in 14 years,” said Fiore. The ISM’s production index reached its highest level since 2010, increasing by 1.9 percent to 65.8. Any number above 50 indicates the economy is expanding. “Those are the numbers you like to see go up — new orders and production,” Fiore said. “I think that puts us in a position of underlying strength and the next few months will flow right along with that.”
Moreover, inventories are declining, meaning manufacturers have to catch up. The ISM's index of customer inventories fell to 42 from 45.5, signaling stockpiles were declining at a faster pace. Factory inventories contracted for the third straight month. “We saw a lot of activity at the end of the year around placing orders for short-term delivery,” Fiore explained. “Companies were focusing in on closing a strong year, but they didn’t want to blow through their budgets. Even with all that activity manufacturers were not able to keep up with demand.”
Manufacturers are seeing customers opening their wallets. “We are seeing a ramp-up with companies releasing early 2018 spend now,” a computer and electronic products executive told the ISM. “Business conditions are good; we are tracking well to our projections for the year,” said another manufacturer. Comments from the ISM panel reflect expanding business conditions, said Fiore, with new orders and production leading gains; order backlogs expanding at a faster rate; and export orders and imports continuing to grow in December. "Supplier deliveries continued to slow [improving] at a faster rate, and inventories continued to contract at a slower rate during the period," he added.
If anything dampens 2018, it will be employment and increased prices. Manufacturing employment in December decreased by 2.7 points to 57, and the prices index grew 3.5 percentage points to 69. This is the 22nd consecutive month manufacturers have faced increases in raw materials prices.
Although employment is still expanding, its rate declined in December, Fiore explained. Manufacturers reported late last year they were having difficulty finding qualified employees. “The overall trend is still up,” Fiore said, “and I think the next couple of months will sort things out.” Many companies are taking advantage of the passage of the new U.S. tax plan to give employees a one-time bonus, which impacts hiring in the short-term. “However, with the new tax provisions and the repatriation of revenue there is no reason why employment won’t be strong in 2018. I think the next couple of months will tell the difference,” Fiore said.
The passage of the new U.S. tax law was not factored into the ISM’s December data, he added. “I think there’s only upside there,” Fiore said.