U.S. manufacturers reported a strong end to 2016, with business conditions improving at the fastest pace since March 2015. At 54.2 in December, up fractionally from 54.1 in November, the seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) continued its recovery from the post-crisis low seen in May (50.7).
The headline PMI signalled a robust improvement in manufacturing sector business conditions, with faster job creation and stock building offsetting slight moderations in output and new order growth since November. Moreover, the latest rise in preproduction inventories was the strongest recorded since the survey began in May 2007. Manufacturers noted that greater stock accumulation reflected stronger optimism towards the demand outlook, alongside faster-than-expected new order growth in recent months.
Manufacturing output expanded for the seventh consecutive month in December, thereby signalling a sustained rebound from the soft patch seen in the second quarter of 2016. The rate of production growth nonetheless eased from October’s 20-month peak. Survey respondents noted that greater sales and efforts to replenish inventories had driven up production volumes at the end of 2016. Reflecting this, stocks of finished goods rose for the third month running, and at the most marked pace since March 2015.
December data revealed a further robust upturn in new work received by manufacturers, with the pace of expansion holding close to the 20-month high seen in November. This was overwhelmingly attributed to improving domestic demand conditions. Meanwhile, export sales were close to stagnation, which contrasted with the modest growth seen on average in the second half of 2016.
Improving business conditions led to increased staff hiring across the manufacturing sector in December. The rate of job creation was the steepest for a year-and-a-half, which helped to alleviate pressures on operating capacity. As a result, the latest rise in backlogs of work was only marginal and the smallest for three months.
Greater purchasing activity continued during December, which marked eight months of sustained expansion. The latest upturn in input buying was linked to increased production schedules and efforts to boost inventories, as highlighted by the survey record rise in stocks of purchases. Despite robust demand for inputs, latest data signalled that suppliers’ delivery times were broadly unchanged since the previous month.
Input price inflation accelerated for the third time in the past four months during December. Moreover, the latest increase in average cost burdens was the largest since October 2014. Manufacturers cited higher steel prices in particular, alongside generally rising raw material costs, including oil. This contributed to an upturn in factory gate charges for the third successive month, although the rate of inflation remained only modest.
Chris Williamson, Chief Business Economist at IHS Markit:
The fourth quarter has seen the strongest PMI readings for one-and-a-half years, suggesting the goods-producing sector is growing at an annualised rate of 2-2.5%.
Companies are gearing up for further growth in coming months: employment is rising at the fastest rate for 18 months and purchasing activity has likewise been ramped up in preparation for higher production. Confidence among producers has clearly improved, setting the scene for a good start to 2017.