The numbers: U.S. manufacturers grew a bit slower in January as the coronavirus caused more work disruptions, but companies are still expanding rapidly and anticipating a stronger economy in 2021.
The Institute for Supply Management said its manufacturing index slipped to 58.7% in January from 60.5% in the prior month. December’s reading was the highest in almost 2½ years and was close to a 16-year peak.
Economists surveyed by Dow Jones and The Wall Street Journal had forecast the ISM index to total 60%.
Readings over 50% indicate growth, and anything over 55% is considered exceptional.
Manufacturers have expanded steadily since the economy reopened last spring, benefiting from a shift in spending toward goods such as new cars or electronics and away from services like dining out or traveling.
What happened: New orders and production came off December’s highs but were still quite robust.
The index for new orders dropped to 61.1% from 67.5% and the production gauge slid 4 points to 60.7%.
Sixteen of the 18 industries tracked by ISM expanded in January, unchanged from the prior month.
The best news in the report was an increase in the employment barometer to 52.6% from 51.7% — the highest level in 20 months.
The rise in employment took place even though the pandemic has spawned more absenteeism among older workers.
Manufacturers have been struggling to find skilled employees to fill job openings for several years now, however, and the problem is likely to worsen once the economy is back to normal.
The biggest problems companies face right now are chronic disruptions in supply lines and shortages of some raw materials that has led to higher prices. These bottlenecks are likely to ease once the pandemic fades.
The ISM index is compiled from a poll of senior executives who are asked whether business is getting better or worse. The gauge tends to rise or fall in tandem with the health of the economy.
What the index doesn’t reveal is just exactly how well companies are doing. Manufacturers were better off before the pandemic.
Big picture: Manufacturers are looking past the record wave of coronavirus cases during the winter to a stronger economic recovery later in 2021 once the vaccines are widely available. Some are busy expanding production to rebuild low inventories or in anticipation of higher sales.
Fresh stimulus from Washington to aid the economy has given them even more optimism that a broader turnaround is at hand.
What they are saying? “The story in a nutshell is that demand is roaring, but manufacturers are having trouble keeping up because they, and their suppliers, can’t hire or keep enough workers,” said chief economist Stephen Stanley of Amherst Pierpont Securities.
“This is why the employment measure has lagged in recent months, not because firms do not want to add workers but because they have not been able to.”