Output growth picks up to four-month high in January

Key findings:

• Production and new orders both rise at sharper rates
• Pace of employment growth accelerates
• Input price inflation eases to one-year low

LONDON — (BUSINESS WIRE) — February 1, 2019 — Overall operating conditions across the U.S. manufacturing sector improved in January, supported by faster expansions in output and new orders. Domestic demand drove new business growth, as new export orders rose only marginally and at the weakest rate since last October. Business confidence about the year ahead also picked up markedly to reach a three-month high. Meanwhile, goods producers increased their workforce numbers strongly amid a quicker rise in new orders. Nonetheless, backlogs continued to expand. On the price front, input cost inflation eased to a 12-month low but remained marked and above the series trend.

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 54.9 in January, up from 53.8 in December. The latest headline figure signalled a strong and faster improvement in the overall health of the sector, and was above the long-run series average.

Supporting the higher PMI reading was a sharp and quicker expansion in production across the manufacturing sector in January. The rise in output was the fastest since last September and stronger than the series trend. Panellists stated that output growth stemmed from greater client demand and efforts to clear backlogs.

Similarly, the upturn in new orders accelerated and was steep overall. The latest rise in new business extended the trend seen throughout the series history. Anecdotal evidence suggested that new client acquisitions and more favourable domestic demand conditions drove the increase. Furthermore, the rate of new export order growth softened in January. The pace of expansion was the slowest since last October and only marginal overall.

In line with greater production requirements, manufacturing firms expanded their workforce numbers at a solid rate, with growth picking up from December's recent low. At the same time, surveyed companies also registered a modest rise in backlogs of work.

Meanwhile, upward price pressures across the manufacturing sector remained marked in January. Panellists continued to note that increased input costs were due to tariffs on steel and aluminium, alongside greater demand for inputs. That said, the rate of cost inflation was the slowest for one year, aided by the feeding through of lower oil prices. Manufacturing firms were able to take advantage of increased client demand and raised their factory gate charges at a faster rate.

Higher production requirements led to a further rise in buying activity, with many respondents also noting a greater need to stockpile for future output.

Finally, business confidence picked up among manufacturers. Panellists stated that positive sentiment stemmed from new client acquisitions and expectations of firmer demand conditions. The degree of optimism was the second-highest since last May.

Commenting on the PMI data, Chris Williamson, Chief Business Economist at IHS Markit, said:

"January saw US manufacturers start the year with renewed vigour. Production rose at a markedly increased rate, commensurate with the factory sector contributing to robust economic growth of approximately 2.5% in the first quarter if such momentum can be sustained in coming months.

“Other encouraging signs included an improved rate of job creation and increased purchasing of inputs, suggesting firms are in the mood for expanding capacity.

“The upturn in business activity in January helped lift confidence in the outlook, though many companies clearly remain concerned about the impact of trade wars and rising protectionism.

“Domestic markets provided the main source of new work for manufacturers, offsetting a near-stalling of export trade, the latter linked to subdued demand for US goods in foreign markets. Although higher than December, the overall rise in new orders was the second-lowest since last August, hinting at a slight cooling of demand growth in recent months which served to keep the headline PMI below the average recorded last year.”

OUTPUT

Production across the manufacturing sector continued to increase sharply in January. The rate of output growth accelerated to the fastest for four months. Where a rise was reported, panellists linked this to a strong start to 2019 and greater client demand. Others suggested increased efforts to clear backlogs supported the upturn in output.

NEW ORDERS

Goods producers registered a sharp rise in new order book volumes in January, with the rate of growth accelerating from that seen in December. The upturn was historically strong and commonly attributed to new client acquisitions and more favourable demand conditions.