ISM factory gauge jumps back in January, but recession still seen ahead

Perhaps the most widely-followed gauge of factory sector activity in the States surprised to the upside at the start of the year, as levels of output and new orders jumped back.

But some economists believed the rebound would be short-lived before a "brief recession" in manufacturing set in, until the US-China trade war stopped.

The Institute of Supply Management's manufacturing sector Purchasing Managers' Index rose from a reading of 54.3 at the end of 2018 to 56.6 for January.

Consensus had expected a smaller gain, from December's initial estimate of 54.1 to 54.3.

The key sub-index of new orders shot higher, from a print of 51.3 for last month to 58.2, alongside an improvement in the output sub-index from 54.1 to 60.5.

A sub-index tracking employment on the other hand dipped by 0.5 points to 55.5, while another linked to the prices paid by firms fell back from 54.9 to 49.6, pointing to an outright fall in companies' prices.

Stockpiling picked-up only slightly, with the corresponding sub-index rising from 51.2 to 52.8.

"This is a welcome surprise, but we're inclined to think of it as temporary respite from the downward pressure rather than the start of a sustained recovery," said Pantheon Macroeconomics's chief economist, Ian Shepherdson.

"Production rose sharply too, but delivery times fell and employment nudged down sharply. Export orders softened again, hitting a 27-month low. The rollover in demand from China is hurting [...] The quicker a trade deal is done with China, the sooner the bottom will be reached. We’re expecting most of the tariffs to be lifted in the spring, while China’s own easing should mean growth bottoms out mid-year."

The new export orders sub-index slipped from 52.8 to 51.8 while that for supplier deliveries fell back from 59.0 to 56.2

Some of the survey responses from purchasing managers appeared to echo Shepherdon's assessment, with managers in Miscellaneous Manufacturing, Machinery, Transportation Equipment and Non-metallic Mineral Products indicating optimism around the outlook for trading.

However, in other sectors such as Paper Products, Furniture and Chemical Products, purchasing managers were less upbeat, with one respondent belonging to the latter telling the ISM panel that: "Concerns about oil prices are fueling questions of how strong the economy will be the first half of 2019."