The pace of U.S. manufacturing growth cooled off a bit in January although overall, domestic production remains solidly in expansion mode. The Institute for Supply Management’s leading indicator, the PMI, reached 59.1 percent in January – one of the highest numbers since December of 2004.
Although the PMI slipped 0.2 percentage points from December, any number above 50 indicates the manufacturing sector is expanding. “Ninety three percent of the industry expanded in January, although from a demand standpoint, demand dropped 2 percent. That’s still the second highest number since December of 2004,” said Tim Fiore, chair of the Institute for Supply Management’s manufacturing survey business committee. “We are still at record levels. If you look at the consumption side, we’re at the second highest level since January of 2011. So, we are still seeing back-to-back months of high numbers.”
The ISM announced seasonal adjustments to the index in mid-January. January's sub-indexes also cooled from December levels: New orders registered 65.4 percent, a decrease of 2 percentage points from the seasonally adjusted December reading of 67.4 percent; and the production index registered 64.5 percent, a 0.7 percentage point decrease compared to the adjusted December reading of 65.2 percent. Supplier deliveries registered 59.1 percent, a 1.9 percentage point increase from the seasonally adjusted December reading of 57.2 percent. The inventories index registered 52.3 percent, an increase of 3.8 percentage points from the December reading of 48.5 percent. The prices index registered 72.7 percent in January, a 4.4 percentage point increase from the December reading of 68.3 percent, indicating higher raw materials prices for the 23rd consecutive month.
“Manufacturing had a very good year in 2017, and today’s new PMI Index data shows only a modest cool-down, with the index still above the 2017 average (of 57.4). Our portfolio companies throughout the U.S. continue to see strong demand for their products,” said Steven Rosen, co-CEO of private equity firm Resilience Capital Partners, which manages $625 million in assets and owns several leading manufacturing companies.
Most of the ISM’s manufacturing sectors report that capital expenditure is fueling their growth. “Business outlook is positive on all fronts right now with our customers,” reported a manager in the computer and electronics sector. “Budgets are being approved for new projects, and component prices from suppliers have temporarily stabilized.” An executive from the machinery sector said the recent reduction of U.S. tax rates is spurring new business.
New export orders registered 59.8 percent in January, an increase of 2.2 percentage points compared with 57.6 percent reported for December, indicating growth in new export orders for the 23rd consecutive month. Exports achieved their highest expansion since April 2011, when the index reached 63.8 percent. “All six big industry sectors, accounting for 71 percent of manufacturing GDP, continued to expand export activity during the period,” says Fiore.
Employment, however, remains a challenge. The employment index registered 54.2 percent, a decrease of 3.9 percentage points from the seasonally adjusted December reading of 58.1 percent. “There are a number of possibilities in the employment number,” said Fiore: “Companies may be letting people go or they are leaving through attrition and not being replaced.” Judging by the sectors most impacted in January—chemical products and food and beverage—it’s likely that seasonality is in play. “A number of our panelists cited weather, and there is also a runup of employment before the holiday season, followed by a week or so of vacation. It usually takes a few weeks after the holidays for production to ramp up again. This is a number that I think will come back and will come back strong.”
Fiore added capital expenditure lead times increased 8 percent during the month of January – another sign of ongoing demand. “Whether that means factories are buying or just getting quotes, they have insight into what’s going on in durable goods. That’s a good indicator because it means order books are filling.”
Although most manufacturers aren’t yet commenting on the impact of new U.S. tax laws, Fiore said the effect will be positive. One-time bonuses to employees means consumers may be buying more than expected. Lower tax rates could benefit businesses in a number of ways. “My sense is that manufacturing is taking a wait and see approach,” said Fiore, “but either way the impact will be positive.”
“Looking at our own manufacturing portfolio companies, we see solid growth continuing for the remainder of 2018," said Rosen. "We expect many of our companies to benefit from the tailwinds of tax reform, the decline of the dollar and opportunities associated with global economic growth.”