US manufacturing expanded at the fastest pace in two years in December 2016
Data from the Institute for Supply Management (ISM) shows that US manufacturing expanded at the fastest pace in two years in December 2016, reflecting stronger output and a surge in new orders since August 2009, as reported by Bloomberg on January 03rd, 2017. US manufacturing remained upbeat despite a stronger dollar, which is expected to hurt exports to some extent. ISM stated that its index of national factory activity increased to 54.7, the fourth straight monthly advance, from 53.2 in November 2016, and the highest since December 2014. A reading above 50 indicates an expansion in manufacturing, which accounts for about 12% of the US economy.
The ISM’s measure of new orders surged 7.2% to the highest level since November 2014. A measure of factory employment rose 0.8% to the highest level since June 2015, while its gauge of prices paid for materials climbed to the highest level since June 2011. The jump in bookings, including the strongest pace of export orders since May 2014, will help keep factories on solid footing in 2017 as business confidence improves. Notably, the gap between new orders and inventory levels reached a three-year high.
The ISM’s index of prices paid climbed to 65.5 from a reading of 54.5 in November 2016. Also, its gauge of new orders increased to 60.2 in December 2016 from 53 in November 2016. The measure of export orders rose to 56 in December 2016 from 52 in the previous month. A rebound in export markets has helped give an added boost to US factories following deceleration over the past couple years. Domestic companies have also made progress getting inventories more in line with demand and there are early signs corporate investment is beginning to firm.
Firming oil prices could help manufacturing
Over the past few months, manufacturing has been bolstered by a recovering oil sector, with rising crude prices boosting energy investment, and a dollar that had stabilized until a recent rally, making US goods more affordable abroad. The greenback, however, has strengthened in recent months against a basket of currencies, fueling concerns of renewed troubles for the nation’s factories.
Earlier in 2016, manufacturing was hit by weak oil prices and lower spending. With oil prices touching 18-month highs on January 03rd, 2017, gas and oil well drilling is expected to perk up.
In a separate report, the Commerce Department said construction spending increased 0.9% to $1.18 trillion in November 2016, the highest level since April 2006, boosted by gains in both private and public sector investment. Construction spending was up 4.1% from a year ago in November 2016, which could prompt economists to raise their GDP estimates for the fourth quarter. The Atlanta Federal Reserve is currently forecasting GDP increasing at a 2.5% annualized rate in Q4 FY16. The economy grew at a 3.4% rate in Q3 FY16.
Production increases, inventories shrink
The ISM’s gauge of production increased to 60.3, the highest since November 2014, from 56 a month earlier. A measure of factory employment picked up to 53.1 in December 2016, from 52.3 the prior month. The national payrolls report due on Friday, January 05th, 2017, from the Labor Department is projected to show about 180,000 jobs were added in December 2016, in-line with the monthly average in 2016. An employment uptick and higher consumer confidence has helped lift demand for products in H2 FY16, particularly after the Presidential elections. The ISM report also showed that factory inventories shrank at a faster pace in December from a month earlier.
The employment index increased modestly to 53.1 from 52.3, indicating that factory payrolls are stabilizing after steady layoffs last year. Of 18 sectors, 11 reported growth, including oil and coal products, primary and fabricated metals, machinery, computers and apparel. Those contracting included furniture, textiles, transportation equipment, and plastic and rubber products.