Summary
Buoyed by gains across various sub-components, the ISM Manufacturing Index broke above 50 for the first time since 2022. Prices, production, employment and new orders all rose in a long-awaited rebound for a sector that has felt the pain of higher interest rates more acutely than others.
Everything Was Going So Smoothly
On a day when financial markets are in a tailspin over the start of a trade war, the ISM Manufacturing Index crested above the 50 line into expansion for the first time since 2022 (chart). News that manufacturing activity is once again in expansion mode will not be salve to worried investors as it reflects a pre-tariff assessment.
There was broad based strength in the ISM with four of the five components that make up the headline index higher at the start of the year. Specifically, new orders leaped three points to 55.1, which marks the fifth-consecutive monthly move higher suggesting more of a trend-step up rather than one-off bump (chart). The measure of current production was also in expansion for the first time in nine months signaling stronger activity.
The one caveat in this report is that stronger activity comes with stronger price pressure. The prices paid index rose to 54.9, consistent with the broadest expansion in manufacturing input prices since May (chart). Eleven industries reported paying higher prices for materials last month. This could prove problematic for the Fed to the extent goods disinflation subsides as services inflation remains elevated, making the road to 2% all the more challenging. This is particularly true in the wake of recent tariff announcements.
President Trump said he would levy a 25% tariff on all imports from Mexico and Canada (10% on Canadian energy) and an additional 10% on goods coming from China by February 4. We estimate this would bring the average tariff rate in the United States up to 8.8% from 2.2% currently. As we note in a recent report, Mexico and Canada account for a large portion of our auto, food and industrial imports specifically, which could drive prices higher and disrupt the supply of key inputs for manufacturers. The select industry comments strike a tone of optimism among purchasing managers with some mention of tariff and supply chain concern.
Factories Hiring Again?
Factories have laid off workers in four out of the past five months, but that may be poised to change. Manufacturing hiring looks to have at least stabilized according to purchasing managers. The employment component rose 4.9 points, which was more than any other sub-component, to crest modestly above 50 in January. That said, the underlying details in terms of number of industries hiring was not overly positive. The ISM services release on Wednesday provides more detail of the broader hiring landscape. When the full employment report is released Friday, we expect to see employers continued to hire at a decent clip of around 185K workers.