The US economy contributes about 25.2% toward the global GDP (gross domestic product), and the manufacturing sector accounts for a tenth of the country’s economy. According to Markit, the US manufacturing flash PMI (purchase managers’ index) rose to 52.7 in January, a rise of 1.5 points from December’s reading of 51.2. Manufacturing activity has picked up from the weak readings of a 38-month low. As a result, the SPDR S&P 500 ETF (SPY) rose 2.1% as of January 22.
In January, the output level rebounded with an increase in new business orders. The improvement in domestic demand rose the pace of expansion.
As a result, the Industrial Select Sector SPDR ETF (XLI) and the SPDR Dow Jones Industrial Average ETF (DIA) rose 0.87% and 1.4%, respectively, as of January 22, 2016. Also, industrial stocks such as Expeditors International of Washington (EXPD), 3M Company (MMM), and Rockwell Automation (ROK) rose 0.58%, 1.3%, and 1.7%, respectively as of January 22.
In January, an overall upturn in new work was seen with improvement in the domestic economic condition. However, cutbacks in new orders from clients in the oil and gas sector were also detected.
The US dollar has strengthened against major world currencies. US exporters have become non-competitive in a foreign market with the rising dollar rate. As a result, export orders rose, but at a marginal pace in January.
With new business growth picking up in January, manufacturers saw backlogs of work getting stabilized. Also, manufacturers raised their levels of input buying. However, companies were seen as cautious about inventory volumes as both finished goods and preproduction inventories were kept at a slightly lower level in January from the previous month.
Though new business growth is rising, companies are taking a cautious approach toward employment.
With the fall in crude and metal prices, cost inflation continued to fall in the manufacturing sector in January. The competitive pressure and lower input cost have kept the output charge inflation lower in January.
On December 16, 2015, the Federal Reserve decided to raise the federal funds rate by 0.25% to 0.50%. The move was to build optimism about the American economy and to avoid the possibility of an asset bubble with persistently low interest rates.
As manufacturing picked up in January, it seems to have reinforced the Federal Reserve’s rate hike decision to support economic growth.
In the next article, let’s look at the business activity growth in the Eurozone.