U.S. factory activity unexpectedly rebounded in January after contracting for five straight months amid a surge in new orders. The Institute for Supply Management’s PMI reached 50.9 percent, an increase of 3.1 percentage points from the seasonally adjusted December reading of 47.8 percent.
The improvement in the PMI likely reflects ebbing trade tensions between the United States and China, which signed a phase 1 trade deal last month. The deal, however, left in place U.S. tariffs on $360 billion of Chinese imports, including the semiconductors, passive components and other devices critical to electronics manufacturing.
Data was also collected before the spread of the deadly coronavirus in China, which has many electronics pundits forecasting shipment delays, component shortages and long-term supply chain disruption.
The PMI’s supporting indexes largely moved up and to the right in January. New orders reached 52 percent, up 4.4 percentage points from the seasonally adjusted December reading of 47.6 percent. Production surged to 54.3 percent, up 9.5 percentage points from December’s adjusted reading of 44.8 percent.
Supplier deliveries and inventory decreased slightly from December levels.
“It would have been hard not to beat December,” said Tim Fiore, chair of the ISM’s manufacturing business survey committee. “Manufacturers now have more new orders to work with.”
Backlogs increased 2.4 percent to 45.7 percent; employment was up 1.4 percent to 46.6 percent; and new exports registered 53.3 percent, a 6-percentage point increase from the December reading of 47.3 percent.
Any number above 50 means the industry is growing; a number below 50 signals contraction.
Manufacturer sentiment was also buoyed in January. “Overall, sentiment this month is moderately positive regarding near-term growth,” Fiore said.
“Business has picked up considerably,” echoed an executive from the computer and electronic products sector. “Many of our suppliers are working at or above full capacity. Tariffs are still a concern and are believed to be a factor in short supply and higher prices of electronic parts. Our profit margin has been somewhat negatively affected by high tariffs, particularly on electronic parts from China.”
A couple of other indicators signal manufacturing isn’t out of the woods yet. Consumption, measured by production and employment, expanded to respond to new order intake, contributing positively (a combined 10.9-percentage point increase) to the PMI. Inputs — expressed as supplier deliveries, inventories and imports — weakened in January, due primarily to increasing contraction in inventories while supplier deliveries remained in expansion territory, but at a modest rate.
Import expansion returned, but also at a moderate rate. Inputs contributed negatively to the PMI calculation, a reversal from the previous month. Prices increased for the second month, a positive for 2020.
“Global trade remains a cross-industry issue, but many respondents were positive for the first time in several months,” said Fiore. Among the six big industry sectors, food, beverage & tobacco products remain the strongest, followed closely by computer and electronic products. “Things expanded at a decent pace for the food and electronics sectors -- two of our bigger segments,” Fiore said. ”If demand remains there, the new order data looks really good and the backlog looks great.”
Fiore did note that commodity lead times are coming down and fuel prices are not increasing, running counter to a booming market. The coronavirus has only added to the uncertainty in global markets, which has suppressed capital expenditure.
“One of positive developments,” Fiore said, “is the trade war has prompted manufacturers to realign their supply chains. The impact of the coronavirus may less than expected."
February will tell the real story, he concluded. “There may be a delay in product imports due to the Chinese lunar holiday, and the viral outbreak is extending the holiday by another week. There is some doubt about the recovery time frame and we may see a backlash [due to production delays].”
IHS Markit is predicting a shortfall in display panels used for TVs, computers and smartphones. Leading Chinese panel makers told the research firm they believe that total capacity utilization for all LCD fabs in the country could fall by at least 10 percent and perhaps by more than 20 percent during the month of February.