US Manufacturing sector starts on a firm footing in 2017

Two separate gauges of the US manufacturing sector confirmed that the sector kicked off 2017 on a firm footing evidenced by acceleration in new orders and output growth.

Factory output in the US was choppy over the past few years with one of the manufacturing gauges, the ISM manufacturing PMI falling into a contraction around late 2015 - early 2016. Manufacturers were squeezed by a stronger dollar which curtailed demand for the US made products. Manufacturing was, however, seen stabilizing by mid-2016.

New order growth accelerates to a 28-month high

The report released last week by IHS Markit suggested that improving business conditions alongside sustained low unemployment helped to boost the manufacturing sector. IHS Markit's manufacturing PMI rose to 55.0 in January, from 54.3 in December. However, the January's headline print was slightly off from the flash estimates which showed a reading of 55.1. Still, a reading above 50 indicates expansion in the manufacturing sector and Markit's gauge of manufacturing PMI continued to rise steadily.

Markit – Manufacturing PMI, U.S.

The IHS Markit's data showed a renewed acceleration in output growth among the manufacturing firms that were surveyed. The rate of expansion rose to the strongest level in 22-months with respondents noting that production volumes had increased with client demand improving. This is expected to boost inventory levels at the start of the year.

The report highlighted the optimism among businesses for the year ahead. Chris Williamson from Markit said, "Production is consequently growing at the strongest rate for almost two years, and inventories are rising at a rate not seen for nearly a decade as firms respond to higher demand, suggesting the goods-producing sector will make a decent contribution to first quarter GDP."

US ISM Manufacturing jumps to a 2-year high

The Institute of Supply Management's (ISM) gauge of manufacturing also showed similar trends. The survey report showed that factory activity in the US accelerated to the fastest pace in more than two years. The ISM manufacturing PMI rose to 56.0 in January up from 54.5 in December.

ISM Manufacturing PMI, January 2017

Some analysts believe that the gains in the manufacturing sector came partly on account of increased optimism among businesses from President Trump who has promised to help the manufacturing sector.

Bradley Holcomb from ISM said that the manufacturing PMI reading reflects "a continuation of the momentum that was built in the latter part of last year and hopes and expectations for the new economy, the new administration, which is settling in to starting its work."

The ISM's report released on Wednesday last week showed that new orders rose to 60.4 in January which was a modest increase from 60.3 recorded in December. Production index jumped from 59.4 in December to 61.4 in January while the employment index rose to 56.1 up from 52.8 in December.

The data also showed that raw material prices continued to rise, now up for eleven consecutive months which underlines the building price pressures at the factory gate. The sub-index showed a strong increase, rising from 65.5 to 69.0 in January.

The strong performance in the manufacturing sector has stoked expectations that the Federal Reserve will hike rates soon. Although at its meeting last week, the Fed gave little hints on when the next rate hike will come while sounding cautious on the recent soft patch of economic growth in the fourth quarter.