U.S. manufacturing activity picked up at its briskest pace in more than six years in December, extending a recovery in the factory sector that has spurred the strongest pricing environment for goods producers since 2011 as the coronavirus pandemic upends supply chain networks.

ISM manufacturing at a two-and-a-half-year high

The December ISM manufacturing report is much stronger than predicted and offers hope that the manufacturing sector can continue to perform strongly and add jobs through 2021. Rather than fall from 57.5 to 56.8 as forecast by the consensus surveys, it actually rose to 60.7, led by gains in output, orders and employment. That was the highest level since August 2018 and followed 57.5 in November. A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the U.S. economy.

With the Chinese Purchasing Managers’ Index (PMI) at very strong levels and Asia being an obvious bright spot it must be that the western part of the US is doing very well, despite the Covid containment measures in California, as are other manufacturers focused towards Asian markets.

ISM versus regional PMIs and ISM versus China PMI

Output is accelerating despite Covid strains

Looking at the details the headline index is now the highest it has been since August 2018 while new orders were up nicely at 67.9 from 65.1 and production rose to 64.8 from 60.8. With customer inventories still looking very low by historical standards (index level at 37.9 where the break-even level is 50) this suggests that the new orders numbers are going to remain firm for a good while to come and that the manufacturing sector looks on course for a very good year.

 

A lengthening in suppliers’ delivery times is normally associated with a strong economy and increased customer demand, which would be a positive contribution. But in this case slower supplier deliveries also likely indicate supply shortages related to the coronavirus pandemic.

But bottlenecks in the supply chain are driving up costs for manufacturers. The survey’s prices paid index jumped to a reading of 77.6 last month, the highest since May 2018, from 65.4 in November. That raises the risk of higher inflation this year, though high unemployment could limit price pressures.

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