In the media and from economists we have heard for years that the United States is no longer a manufacturing economy. With close to 70% of gross domestic product (GDP) tied to consumer spending efforts, that should be somewhat obvious. Infrequently discussed is that much manufacturing still takes place outside of America, with many U.S. manufacturing companies owning factories outside of the United States, where labor is cheaper or closer to the markets they serve.

Two key economic reports were released on Monday, both issued by the private sector rather than by government agencies. They showed that the manufacturing economy was positive in the month of January.

The key manufacturing index from the Institute for Supply Management (ISM) rose to 50.9 in January. That was above the 48.5 expected by economists (Wall Street Journal) and above the 47.2 reading in December. Readings above 50.0 are generally correlated with growth.

Most areas of the ISM report showed strength, with the production reading and the new orders component both at their highest levels since last April. The readings on manufacturing employment and order backlogs improved, but both were still under the 50.0 growth line.

What is interesting about the growth of the ISM index is that it is still somewhat concentrated per the release. Of the 18 manufacturing industries tracked, eight reported growth and eight showed contraction in January. The ISM report said:

The New Orders Index registered 52 percent, an increase of 4.4 percentage points from the seasonally adjusted December reading of 47.6 percent. The Production Index registered 54.3 percent, up 9.5 percentage points compared to the seasonally adjusted December reading of 44.8 percent. The Backlog of Orders Index registered 45.7 percent, up 2.4 percentage points compared to the December reading of 43.3 percent. The Employment Index registered 46.6 percent, a 1.4-percentage point increase from the seasonally adjusted December reading of 45.2 percent.

The ISM’s Timothy Fiore said of the month:

Comments from the panel were positive, with sentiment improving compared to December. The PMI returned to expansion territory for the first time since July 2019… Global trade remains a cross-industry issue, but many respondents were positive for the first time in several months. Among the six big industry sectors, Food, Beverage & Tobacco Products remains the strongest, followed closely by Computer & Electronic Products. Petroleum & Coal Products is the weakest. Overall, sentiment this month is moderately positive regarding near-term growth.

IHS Markit also issued its purchasing managers index (PMI) for January. This index ticked up to 51.9 for manufacturing activity. That was higher than the 51.7 flash estimate released earlier in the month, and it matched the Econoday consensus estimate. Still, that was lower than the 52.4 reading from December.

While that reading also was above the generally accepted growth line, there was weakness from a renewed decline in export orders. Also shown in the IHS Markit report were less aggressive demand and slower hiring with inflation remaining weak. A positive in the report was that manufacturers have expressed confidence about a rise in overall production over 2020.

Chris Williamson, Chief Business Economist at IHS Markit, was less than enthusiastic about January’s report:

US manufacturing limped into 2020, with falling exports dampening output growth and causing a pull-back in hiring. The survey data are consistent with factory production falling moderately, meaning the manufacturing sector looks set to act as a drag on the overall economy once again in the first quarter.

Weakness looks broad-based. Rising demand from households has helped support production in recent months, but January saw a marked slowing in new orders for consumer goods. Production of capital goods such as business equipment, plant and machinery meanwhile fell for the first time in almost four years, hinting at weakened business investment.

More encouragingly, business expectations for the year ahead perked up, coinciding with an easing of trade tensions and the signing of new North American and Chinese trade deals. Companies are therefore expecting the soft patch to be short-lived, though fears surrounding the Wuhan coronavirus and any further potential escalation of trade tensions could erode this optimism.

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