US factories experienced a modest growth rate in January

Daniel Fowler
February 2, 2021

The moderation in activity reported by the Institute for Supply Management on Monday reflected a flare-up in COVID-19 infections, causing labor shortages in factories and their suppliers, which the ISM said "will continue to restrict the manufacturing economy expansion until the coronavirus crisis abates".

"We expect manufacturing momentum to begin to slow around the middle of the year as vaccine distribution unlocks badly damaged service businesses while reducing demand for consumer goods", said Oren Klachkin, senior United States economist at Oxford Economics in NY.

USA manufacturing continued to grow at an exceptionally fast pace in January despite rising coronavirus cases, political turmoil, and mounting evidence of sluggishness in the labor market and retail sector.

But China's manufacturing activity expanded at the slowest pace in seven months in January, weighed down by falling export orders.

Any reading above 50 indicates expansion in the manufacturing sector.

He said that issues such as absenteeism, short-term shutdowns to sanitize facilities, and difficulties in returning and hiring workers continue to be challenges that "limit manufacturing growth potential".

Economists surveyed by Econoday forecast a reading of 60 percent.

Of 18 manufacturing sectors surveyed, only two, the printing and coal and petroleum industries, reported contraction last month.

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New orders dropped 6.4 points to 61.1 percent, while production lost four points to hit 60.7 percent. The PMI has averaged 53.1 percent the past 12 months. January posts the eighth consecutive month signaling expansion of manufacturing activity.

Perhaps the main manufacturing-related concern, according to Fiore, is related to labor constraints.

The ISM revised data going back to 2012. In the transportation equipment industry, a respondent reported strong demand and limitations in supply to meet the increased demand. Still, a contraction is unlikely as customer inventories remain extremely lean.

In the meantime, he noted that as the USA dollar is weakening, it is supporting high commodity prices, coupled with the expectation that New Export Orders could head up in the coming months.

The employment index rose 0.9 percentage points to 52.6%.

But bottlenecks in the supply chain continued to drive up costs for manufacturers. Continued Chinese economic success despite COVID-19 may prompt some countries still struggling to recover economically from the pandemic to view the Chinese state-owned company model as an answer to stimulate their domestic economies.

The inventories index came in at 50.8, nearly unchanged from December, and the prices index continued its upward trend and reached 82.1. That's a positive sign ahead of Friday's January jobs report, which is expected to show a small rise in employment, supported in large part by manufacturing hiring.

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