MNI INTERVIEW: US Factories To See Expansion By Feb- ISM
MNI (WASHINGTON) - Improving demand is set to propel U.S. factories into expansionary territory but how long that will be sustained depends on whether inflation picks up again, the Institute for Supply Management's report on manufacturing chief Timothy Fiore told MNI Friday.
December's composite index surprised higher at 49.3, a nine-month peak and nearly a point higher than analysts expected. The sub-50 reading still indicates contraction but demand indicators are improving across the board, Fiore said.
"We haven’t had demand in two years. November may have been the first time to see growth coming and December continues the cycle," Fiore said. By February he said the headline index should break 50.
New orders rose a fourth straight month to 52.5 and export orders rose to a breakeven 50.0, a seven-month high. Production also stabilized compared with the previous month, hitting 50.3, an eight-month high. Headcount reductions that began mid-year continued through the month but isn't expected to carry over into the new year, Fiore said.
"The only confirmation I’m waiting for to see that demand is back is to see the supplier delivery index at 54 or 55, which would mean they’re not able to respond to order streams coming in, generally because they have too much to do." That index rose to 50.1 last month, indicating slowing delivery times.
TARIFFS
Potential tariffs from the incoming Donald Trump administration were top of mind for factory purchasing managers last month, dominating comments, Fiore said.
Manufacturers showed a willingness to invest in inventory, possibly to get ahead of new tariffs, and many were discussing how to prevent disruptions to their supply chains, he said.
"A lot of comments are on having plans to address it, finding alternative suppliers," he said, adding purchasing managers were concerned about the impact to both purchasing costs and effect on export sales. "I won’t expect to see any impact on the PMI until the April time frame."
INFLATION RISK
The prices subindex rose more than expected in December to 52.5, showing some pressure against official inflation indicators that have flatlined in recent months.
An expansion in manufacturing can be sustained "until inflation possibly comes back," Fiore said. "The fact that CPI, PPI and PCE have been flat for the last couple months is a signal. Where can this go? Is it going to go down? Not when you have growth coming. It can only go one way and that’s up." (See: MNI: Fed's Inflation Fears Back On Rise, Even Before Tariffs)
But a shifting business environment may dampen price pressures. Factories surveyed by ISM in the fourth quarter of 2024 reported less ability to pass on price increases, with 44% saying they are not able to pass on higher costs, compared to 28% two years earlier, Fiore said.
"The big question is price growth, inflation, and can you pass it on? If you can it’ll fuel the inflation spiral and that may slow things down."