Manufacturing Beats Estimates in January as New Orders and Prices Rise: Why It’s Bad News for Inflation – Materials Select Sector SPDR (ARCA:XLB)

The US manufacturing sector showed signs of recovery in January, supported by a significant increase in new orders, potentially marking the end of a prolonged phase of contraction.

Data released on Thursday highlighted an upward revision in the final reading of the S&P Global US Manufacturing PMI and a better-than-expected release for the ISM Manufacturing PMI.

Both assessments of manufacturing activity point to a robust rebound in new orders. They also highlight rising raw material costs and highlight the need for close monitoring of recent disruptions to international trade.

Index January 2024 December 2023 Notes
S&P Global Manufacturing PMI 50.7 47.4 Revised up from 50.3, highest since September 2022, first expansion since April 2023
ISM Manufacturing PMI 49.1 47.1 Exceeds the 47 expected. New orders increase, pressure on prices increases

US Manufacturing Sector Recovers in January: Key Takeaways

  • The S&P Global US Manufacturing PMI was revised upward from a preliminary estimate of 50.3 to 50.7 in January 2024, up from 47.4 in December.
  • This adjustment suggests a more significant improvement in manufacturing conditions than initially expected, marking the largest reading since September 2022 and the first sign of expansionary conditions since April 2023.
  • The main factor behind the increase in the overall figure was a renewed expansion in new orders at manufacturing companies earlier in the year.
  • In January, confidence among goods producers rose to its highest level in 21 months, driven by marketing spending and capacity expansion, along with expectations of improving demand conditions.
  • At the same time, the Institute for Supply Management (ISM) reported that its manufacturing PMI reached 49.1 in January, up from 47.1 in December and significantly above the expected 47. Despite this improvement, the reading remained below 50, indicating the 15th consecutive month of contraction.
  • The ISM index of new orders entered expansion territory at 52.5%, a significant increase of 5.5 percentage points compared to the seasonally adjusted figure of 47% observed in December.
  • The ISM price index stood at 52.9%, up 7.7 percentage points from 45.2% in December. This increase suggests that commodity prices increased in January after eight consecutive months of decline.

Read also: Russian oil hits American shores due to anti-sanctions loophole

Economist Takeaway

“Producers started the year with a spring pace,” Chris Williamsonchief business economist at S&P Global Market Intelligence, he said.

Williamson highlighted that business optimism for next year has risen to the highest level since the start of 2022, driven by a surge in demand. New orders are rising at a pace not seen in more than a year and a half, with an especially sharp improvement in consumer goods as households begin to feel the benefits of easing inflation and more relaxed financial conditions.

This positive outlook is tempered by indications of rising factory prices due to supply delays, often linked to adverse weather conditions and recent disruptions in global shipping.

“Renewed upward pressure on consumer prices could therefore arise in the coming months if these supply-side inflationary trends persist,” Williamson said.

Timothy R. Fiore, chair of the ISM Manufacturing Business Survey Committee, said: “Demand remains weak but shows signs of improvement and production execution has stabilized since December. Panelists’ companies continually manage output, material inputs, and labor costs.

THE Materials Select the sector SPDR fund XLB at the time of publication it was trading up 0.5%.

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