December’s ISM reading of 54.7% was up from 53.2% in November and much higher than the anticipated 53.7%. The important production index rose to 60.3% (its highest since November 2014), while the new orders index jumped to 60.2%. The employment index was also stronger at 53.1%. Comments from the respondents were again very optimistic; with some industries mentioning shortages of skilled workers, and food, beverages, and tobacco industries mentioning rising inflation (the prices paid index rose to 65.5, the highest since June 2011).
Bottom line: December’s ISM at 54.7% was the strongest in two years and again solidly in expansion territory following a drop below in August. Sentiment from those surveyed was encouraging, with comments below once again exuding a much stronger sense of optimism. Nevertheless, the improvement in aggregate manufacturing activity will continue to be relatively slow, due to the stronger dollar, and still soft global demand. Also, any infrastructure spending initiative will likely take time to pass through Congress and even longer for ‘shovel ready’ projects to be initiated and financed by the private sector; however, companies’ animal spirits are clearly and encouragingly on the rise. The Fed will be pleased with this result, and will be paying very close attention to fiscal policy developments.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.