Manufacturing Growth Picks up Pace in January

February 2, 2012
Manufacturing Growth Picks up Pace in January

By Ilya Leybovich

The U.S. manufacturing industry continued to expand through January, as an increase in new orders accelerated the growth rate to its highest level in seven months.

Business activity in the United States manufacturing sector posted strong growth in January, and the rate of expansion increased, continuing a series of monthly increases in the pace of growth through the fall and winter. However, concerns remain about employment conditions in the sector, as well as rising costs for raw materials.

According to the Institute for Supply Management's (ISM) latest manufacturing Report on Business, U.S. manufacturing expanded for the 30th consecutive month in January, reflecting overall growth in the U.S. economy, which grew for the 32nd consecutive month.

The ISM purchasing managers' index (PMI), a key monthly gauge for the manufacturing sector, climbed to 54.1 last month, up from 53.1 in December and marking the highest index reading since June 2011. Readings above 50 indicate overall growth for the industry. Despite the gain, January's PMI was still slightly below the 12-month average of 54.7. The index has been on a general trend of accelerating growth since October 2011.

"Stocks rose on optimism the factory reports show the world economy is withstanding fallout from Europe's debt crisis," Bloomberg News notes. "Production, led by inventory rebuilding at the end of 2011, is poised to keep expanding in the U.S. as the need to update equipment drives orders at companies like Caterpillar Inc. and demand for cars rises."

The ISM new orders index rose to 57.6 in January, up from 54.8 in December, marking the 33rd consecutive month of growth in demand and indicating that the pace of expansion is accelerating. New orders reached their highest level in nine months in January. Exports also rose, climbing to 55 from 53 in December, indicating that U.S. manufacturers haven't yet been significantly affected by a slowdown in European economic growth.

Nine of the 18 industries tracked by the ISM reported growth last month: apparel, leather and allied products; petroleum and coal products; machinery; computer and electronic products; transportation equipment; miscellaneous manufacturing; fabricated metal products; paper products; and primary metals.

Meanwhile, seven industries reported contraction: plastics and rubber products; furniture and related products; wood products; chemical products; food, beverage and tobacco products; electrical equipment, appliances and components; and textile mills.

Despite the overall growth, the latest monthly findings fell slightly short of expectations, as economists polled by MarketWatch had forecast the PMI to rise to 54.5 in January.

There were also some signs of sluggishness amid the gains last month. The ISM's production index fell from 58.9 in December to 55.7 in January, signaling a slowdown in the growth rate. Meanwhile, the prices index surged upward, climbing from 47.5 in December to 55.5 in January, raising concerns over the cost of raw materials.

The employment index posted a slight decline, dropping from 54.8 to 54.3 in January. While manufacturing businesses continue to hire, the pace has slackened a bit. However, the backlog of orders increased from 48 to 52.5, suggesting manufacturers may lack the resources to meet rising demand and that a new round of hiring could result.

The manufacturing sector is poised to continue expanding over the next quarter as long as demand for equipment and supplies remains elevated, but much of that demand depends on consumer spending rates.

"[E]conomists are concerned that a key source of factory growth could wither in the coming months. They note that a key reason the economy grew at an annual rate of 2.8 percent in the final three months of last year was that was companies restocked their supplies at a robust pace. That restocking is likely to slow in the first three months of this year," the Associated Press explains. "Unless consumer spending picks up, businesses won't be able to sell off that extra inventory, and may have to cut back on future orders."