US: ISM Manufacturing Index Jumps in January

Post-Fiscal Cliff Relief?

January’s reading for activity in the nation’s manufacturing sector is the strongest reported since April of last year and the largest monthly jump in more than two-and-a-half years. In the final six months of 2012, the ISM was range-bound between 49.9 and 51.7, meaning that there was a lack of conviction in either direction. It is tempting to view today’s jump as an indication that the factory sector is poised to shift from slow growth into a somewhat faster pace of expansion. Indeed, viewed in combination with yesterday’s stronger-than-expected reading from the Chicago PMI, there is certainly more than just one robin heralding the arrival of spring. That said, we are not yet convinced that business spending and industrial production are poised to take off. Instead, perhaps what we are seeing is some relief over the short-term deal to avoid the fiscal cliff and another one-year extension of bonus depreciation. 

One clear positive in today’s report is the 3.6 percentage point jump in the new orders index. Just a few months ago, core capital goods orders were falling at a more than 20 percent rate on a three-month annualized basis, and just last month, the new orders component was in contraction territory. As large as the jump in orders was, however, the largest overall contribution to the increase was the 8.0 percentage point spike in inventories. This also seems to be a manifestation of the sense of relief in the absence of a fiscal cliff. Whereas previously businesses were hunkering down and drawing down inventories, January apparently ushered in a sense that it was OK to add to stockpiles again. The employment index climbed to 54.0 from 51.9. Combined with this morning’s generally strong jobs report, this tells us that the labor market is continuing to heal. 

What Happened to Trade & Implications for Our Outlook 

Both the export index and the import index lost momentum in January, with the larger drop on the import side. The export index fell to 50.5 signaling a slower pace of growth, while the import index fell to 50.0, indicating essentially no change in import activity for businesses. Given the recent run of disappointing economic figures from Europe this is not a complete surprise. That said, we expect growth to return to the Eurozone and to the United Kingdom this year, and we expect Chinese GDP growth to stabilize. Taken together our global forecast should be supportive of an improvement in trade as the year progresses. After a slow start to 2013, we expect to see a roughly 2 percent annual growth rate for GDP from the second quarter on. In terms of the outlook for business spending, the picture appears to be brightening as confidence firms and increases in orders have been exceeding expectations.