US: ISM survey suggests factory sector recovery remains firmly in place - Wells Fargo

The ISM Manufacturing Index came in at 59.1 for January, picking up right where 2017 left off, said analysts from Wells Fargo. They expect that rising energy prices will help boost headline CPI and PCE inflation above 2% in the coming months

Key Quotes: 

“The ISM Manufacturing survey for January ticked down two-tenths of a point from December to a still-strong 59.1. The current production component remained above 60 for the eighth consecutive month, registering a solid 64.5. New orders ticked down slightly from the sky-high 67.4 level in December but remained strong at 65.4. Backlogged orders also rose in the month, as did supplier delivery times, suggesting the recent momentum should continue in the near-term.”

“While this morning’s ISM print is certainly a reason for optimism, we caution about taking this relationship to literally. The ISM averaged 58.7 in Q4-2017, for instance, but real GDP growth was just 2.6 percent.”

“The prices paid component rose to 72.7, a level not seen since May 2011 when oil was near $100 a barrel and spare capacity from the Great Recession was still coming back online. All 18 industries reported paying increased prices for raw materials in January.”

“Our expectation is that rising energy prices will help boost headline CPI and PCE inflation above 2 percent in the coming months, but that core price inflation will continue to hover just above/below two percent for the CPI and PCE deflator, respectively.”

“On balance, this morning’s ISM survey suggests the factory sector recovery that took hold in 2017 remains firmly in place. The collective 2015-2016 headwinds of weak demand at home and abroad, falling commodity prices and a strong U.S. dollar have been flipped on their heads, with no immediate end in sight. We expect real business equipment investment to accelerate to an 8.3 percent pace in 2018, up from 4.8 percent in 2017 and an outright decline of 3.4 percent in 2016.”