The nation’s leading factory index, the Institute for Supply Management’s PMI, regained some lost ground in January following a precipitous December drop. January’s PMI increased by 2.3 percentage points to 56.6; December’s index decreased by 5.4% to 54.3.
Any number above 50 indicates growth, and the PMI has been in the 50-plus range for 29 months. But December’s slowdown rattled the industry.
“December tends to be the slowest month for manufacturing,” said Tim Fiore, chair of the ISM’s manufacturing business survey committee, “and what drove most of the activity that month was new orders [which decreased by 11 points]. Lead times had contracted, so there wasn’t the urgency to place new orders quickly. A 2.3% increase [in January] is better than other rebounds we have seen in the past.”
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That doesn’t mean there’s smooth sailing ahead. Although new orders in January grew 6.9% to 51.3 and production increased by 6.4% to 60.5; the supplier delivery, backlog and prices indexes all declined.
“Demand expansion improved with new orders returning to the high 50s,” Fiore said, “but customers’ inventories remain too low and backlog remained at a near-zero-expansion level. This is of concern, because their performance wasn’t commensurate with the uptick in production. This indicates there’s been a slackening of demand.”
Supplier deliveries registered 56.2%, a 2.8 percentage point decrease from December. Inventories reached 52.8%, up 1.65. The ISM’s prices index registered 49.6%-- a 5.3-percentage point decrease from December -- indicating lower raw materials prices for the first time in nearly three years.
“Consumption continued to strengthen,” Fiore explained, “with production expanding strongly and employment continuing to expand at previous-month levels. Inputs — expressed as supplier deliveries, inventories and imports — continued to improve, but are negative to PMI expansion. These inputs reflect an easing business environment, confirmed by the prices index contraction.”
The tech industry improved in January and contributed to the PMI’s increase, Fiore added. “Tech didn’t bounce to levels above 60 but was one of four industries that reached the high fifties.” One electronics executive described “a steady supply and production environment.”
Electronics manufacturers will continue to struggle with supply constraints. The ISM noted a continuing shortage of electronic components, and printed circuit boards (PCB) and PCB assemblies have joined the “in short supply” list.
Overall, manufacturers’ comments reflect continued expanding business strength, supported by strong demand and output, Fiore said. However, tariff concerns remain a headwind, and export levels are approaching record lows.
“Exports continue to expand, but at the lowest level since the fourth quarter of 2016,” he said. “Prices contracted for the first time since the first quarter of 2016. The manufacturing sector continues to reverse December’s weak expansion, but inputs and prices indicate fundamental changes in supply chain constraints.”