January’s manufacturing data shows US economy could pull off desired “soft landing”

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The Manufacturing PMI for the US has been in contraction territory for 15 consecutive months, but “early indications are that the sector is ready to begin its next growth cycle. 

he hope for a soft landing for the US economy, and the manufacturing sector in particular, is looking more realistic following the January results from the Manufacturing ISM Report on Business.

The Institute for Supply Management (ISM) has argued that for the soft landing to have a chance of occurring demand levels had to bounce back. The January data showed evidence that demand, in ISM’s language, is “approaching the runway – or at least asking for clearance.”

The composite PMI of 49.1 percent exceeded expectations, powered by the New Orders Index ending a 16-month stay in contraction territory by registering 52.5 percent, its highest reading since May 2022.

New Orders is one of four subindexes that gauge demand, and three of them had positive readings in January, Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management Manufacturing Business Survey Committee, told a conference call of reporters after the data was released.

The Manufacturing PMI has been in contraction territory for 15 consecutive months, but “early indications are that (the sector is) ready to begin its next growth cycle,” Fiore said. “But it’s early.”

Among the other demand yardsticks:

  • The Customers’ Inventories Index, which measures the amount of product on shelves, fell to 43.7 percent — technically in contraction, but a lower reading is considered a good sign for future new orders and production.
  • The Backlog of Orders Index (44.7 percent) remained in contraction and was down compared to December, despite new orders growth. That’s a sign that production was stable; Fiore said he doesn’t expect backlogs to expand until after the first quarter.
  • The New Export Orders Index (45.2 percent) was the only downer, signaling continuing buying sluggishness in such markets as Europe and China. Though exports account for less than 20 percent of American manufacturing output, a positive New Orders Index reading with little help from overseas speaks to the strength of the U.S. economy, Fiore said.

Also, the Production Index, which had been in contraction in 10 of the previous 13 months, moved into expansion at 50.4 percent. Add it all up, and Fiore believes the Manufacturing PMI remains on track to traverse in expansion territory sometime this spring.

“I’m still bullish on that,” he said. “Some of these numbers were a surprise to me, and I know they were for many in the economic community. But when the sector overperforms, it’s definitely appreciated. It’s the beginning of something, and other things need to happen for it to prove out.”

Fiore added, “But it looks like the manufacturing sector is finally waking up and is getting ready to start running.”

As for what needs to improve, the Employment Index remained in contraction at 47.1 percent, but Fiore said companies are still right-sizing their head counts, and they aren’t going to stampede to add staff until a demand increase is more definitive. For every Business Survey Committee respondent comment about adding workers in January, there were 1.3 about reducing staff, he added.

Fiore said, “There’s been some momentum since the (U.S. Federal Reserve) meeting in December,” where chair Jerome Powell announced interest rates would stay put, with cuts possible this year. However, he added, “There’s not high-scale euphoria that happy days are here again yet. There’s not been dramatic growth that would require a dramatic increase in employment. It’s going to be phased in over time.”

The Prices Index returned to expansion (or “increasing”) territory for the first time in nine months, hitting 52.9 percent. That’s largely the result of the calendar turn bringing new pricing agreements between companies and suppliers. Such commodities as metals and plastics have been on the rise, but Fiore said he does not expect the Prices Index to increase dramatically in the coming months.

So, with many of the fundamentals promising — and Chemical Products, now the largest manufacturing industry by contribution to gross domestic product, posting a PMIof above 50 percent — anticipation of overall sector growth is heating up.

“It’s as if the sector has been practicing over the airport for a few months and is (ready to land),” Fiore said. “But it’s still touch and go, a little slow. It’s not a fighter jet that’s coming in. It’s more like a cargo flight.”

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