ISM Manufacturing Index Jumps to Highest Since August 2004

The US manufacturing sector showed a strong burst of activity in January, as the ISM Manufacturing index rose to 58.4 from December 54.9. Expectations had been for a 55.5 reading. January’s figure was the best since August 2004. While the new orders remained close to its December level, posting a 65.9 for January, the production index rose more than 4 points to 66.2. Also, the employment index rose to 53., which is the highest level since April 2006, and is a good indication for positive hiring in the sector for the month. Rounding out the key sub-indexes, the prices sub-gauge jumped to 70, showing price pressures increasing.

Overall its a very strong report and will continue the meme that the US manufacturing sector is helping to lead the growth during this recovery and shows that the US economy may be out performing its main rivals in the UK, Euro-zone and Japan. If that shifts expectations about interest rate outlooks for the major central banks in favor of the Fed, then the greenback could see continued strength in the coming weeks. A lot will hinge on Friday’s non-farm payroll report, which right now is expected to show a small jobs gain for the month of January.

Personal Spending Up 0.2%, Incomes Rise 0.4% in December

While spending by US consumers rose for the third consecutive month in December, helping to signal that the biggest part of the economy will contribute to economic growth, the figure was smaller than forecast (0.3%), though the figure for November was revised higher to 0.7% from the orginally reported 0.5%. Incomes meanwhile, rose by 0.4%.

Spending has recovered, but its impact may be capped if unemployment remains at 10%. Trying to get firms hiring is why the Obama administration is proposing a $100 billion jobs bill which would incentivize companies to hire more workers. More hiring leads to more confident consumers, which leads to further spending, which in tern leads to more hiring.  That is a positive cycle that is needed to get the economy to recoup some of the job losses seen during the recession. The GDP grew at a 5.7% annual rate in the fourth quarter, exceeding the median forecast of economists. In that report consumer spending climbed at 2% pace, which also exceeded expectations, though it was lower than the 2.8% pace seen in the 3rd quarter.

Finally, the spending and income report also features an important reading on inflation, the core PCE (personal consumption expenditure) price index. That reading rose 0.1%, as expected, following flat month fpr prices in November. That shows that inflation reamins to be muted, and so far is not a concern for the FOMC.