Manufacturing in the U.S. Just Accelerated to Its Best Year Since 2004

Photographer: Jim Young/Bloomberg

U.S. manufacturing expanded in December at the fastest pace in three months, as gains in orders and production capped the strongest year for factories since 2004, the Institute for Supply Management said Wednesday.

Highlights of ISM Manufacturing (December)

Factory index climbed to 59.7 (est. 58.2) from 58.2 a month earlier; readings above 50 indicate expansion
Gauge of new orders advanced to 69.4, the highest in nearly 14 years, from 64
Measure of production increased to 65.8, the strongest since May 2010, from 63.9

Key Takeaways

The survey-based measure of factory activity -- the year’s second-highest behind September, when storm-related supply delays boosted the index -- brings the 2017 average to 57.6, the best in 13 years. The latest gain extends a string of strong readings that’s been fueled by more domestic business investment, improving global economies and steady spending by American households.

A common refrain from companies surveyed, though, was difficulty finding highly-skilled labor, and some firms are paying higher wages to attract the workforce needed, ISM manufacturing survey committee chairman Timothy Fiore said on a conference call with reporters.

The acceleration in bookings indicates production will remain robust in coming months as factories race to limit mounting order backlogs amid declining customer inventories. Increasing export orders underscore improvement in global markets.

The figures suggest manufacturing strength will persist into early 2018, even after the ISM’s semi-annual survey of purchasing managers published last month showed factories anticipate growth in capital spending to slow this year. The December monthly poll was taken before President Donald Trump signed the tax legislation, which provides companies with incentives to invest more, Fiore said in an interview.

What Our Economists Say

Bloomberg Economics’ assessment that the dip in the November ISM headline was a headfake proved accurate. This was due to the alleviation of bottlenecks following the hurricanes, whereby supplier deliveries weighed on the headline. The December results showed a payback for this effect. However, it was not just that, as enthusiasm for the tax reform bill’s passage bolstered business confidence. This may not be the end of the ISM’s climb, as both new orders and production posted further gains in the month. Business sentiment has been high enough for long enough that it is actually starting to drive the “hard data” in a positive direction.

-- Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Economics

Other Details

Sixteen of 18 industries reported growth in December, led by machinery and computer and electronic products; wood products and textile mills reported contraction
ISM factory employment gauge declined to a still-strong 57 from 59.7
Measure of export orders increased to a six-month high of 58.5 from 56
Gauge of supplier deliveries climbed to 57.9 from 56.5, indicating stronger demand was leading to longer lead times
Index of customer inventories fell to 42 from 45.5, signaling stockpiles were declining at a faster pace
Factory inventories index showed a third straight month of contraction
Index of prices paid climbed to 69 from 65.5