Economic activity in the manufacturing sector expanded in December for the 16th straight month and the overall economy grew for the 103rd consecutive month, according to the monthly survey of the nation's supply executives by the Institute for Supply Management and its Purchasing Managers' Index (PMI). The unexpected increase by the headline index was partly due to a notable acceleration in the pace of new orders growth, as the new orders index jumped to 69.4 in December from 64.0 in November. Any reading above 50 indicates growth in the sector. Eight of the ten index components grew, while the inventories and customers' inventories indexes both contracted.
New orders to manufacturers was the report's major highlight, reaching an nearly 14-year-high, ISM said.
A separate but similar report from the financial information services provider IHS Markit also showed improved results with its gauge showing manufacturing growth in December was the best since March 2015.
Tremendous December gains in domestic manufacturing made 2017 the strongest year for USA manufacturing since 2004. December data also rounded off the strongest quarterly performance since the start of 2015. The PMI averaged 57.6% in 2017 and has been above 50% for 16 consecutive months. Panelists attributed greater production to more favorable demand conditions and increased new order volumes. Two industries reported contraction during the period: wood products and textile mills. That indicated that manufacturers were still adding jobs but at a slower rate.
Manufacturers expected to see six months of price increases for some raw materials in the wake of the late summer hurricanes - especially Hurricane Harvey's hit to the key chemical and oil production facilities in Houston. In responding to ISM's survey, 65 percent stated that they had difficulty hiring new employees and 44 percent increased starting pay in an effort to attract new workers.
Andrew Hunter, US economist at Capital Economics, said the rebound in the ISM manufacturing index leaves it close to a 13-year high and at a level that historically has been consistent with GDP growth accelerating to more than 4% in annual terms.