January was another great month for U.S. factories because businesses are continuing to invest in more equipment.
“Sales of such long-lasting goods indicates companies are investing to expand their production capacity. The lead time for filling those orders rose 8% over the month because factories are being flooded with new orders, said Tim Fiore, head of the ISM survey,” writes Wall Street Journal.
Last week, the Institute for Supply Management (ISM) reported that the factory activity is at its third-highest level since 2011. This means there has been an increase in product sales, factory employment and raw-material prices.
New orders, specifically, saw a slight decline from December, but still remained high at 65.4. There was such a demand, that manufacturers are struggling to keep up, according to Jennifer Lee, a senior economist at BMO Capital Markets in Toronto, as reported by Reuters.
“Manufacturers reported an increase in export orders and most offered an upbeat assessment of business conditions,” writes Reuters. “Manufacturers of computer and electronic products said, “budgets are being approved for new projects.” Furniture manufacturers reported that “our usual winter slowdown has not occurred, and we are very busy with new orders.”
Prices for raw materials are on the rise too.
“We’re still accelerating,” said Tim Fiore, the head of the ISM survey. “There are a lot of strong feelings 2018 is going to be a good year.”
As the U.S. economy continues to grow and businesses pick-up in spending, the more the factory sector will see a surge.
The new GOP tax plan will evidently foster economic prosperity and the unemployment rate is at an all-time low. The massive cut of the corporate tax rate from 35% to 21% will give businesses additional revenue to spend elsewhere.
“Healthy demand for U.S. manufactured goods should persist especially as savings from tax cuts is spent, and as long as healthy global demand persists,” said Fotios Raptis, senior economist at TD Economics.
“The president gets credit for boosting overall business optimism and consumer confidence, although both had been rising for years before he took office. But a weaker dollar, which makes it easier for American companies to sell products abroad, and an ever-stronger global economy have also helped factories grow,” writes CNN Money.
Factory output growth in Japan, China, Greece, Italy, Germany and France has also increased in response to the global demand for new orders.
“The eurozone’s manufacturing boom continued in full swing in January. Output grew at one of the fastest rates recorded over the survey’s 20-year history, matched by a further near-record surge in new orders,” said Chris Williamson, chief business economist at IHS Markit to The Guardian.
But as more consumers and businesses spend the more inflation becomes an issue. To counteract this, the Federal Reserve has said that this year there will be three rate increases.
These will slow down the economy, so it doesn’t burst.
“The labor market is near full employment, with the jobless rate at a 17-year low of 4.1 percent. A tightening of labor market conditions has raised optimism among Fed officials that inflation will rise toward the U.S. central bank’s 2 percent target this year,” write Reuters.
Author’s note: Manufacturing jobs generally pay more, which will provide another boost to the economy. The spike in growth in the factory sector is just after Trump’s first year too, even before the tax plan kicks in. This is just the beginning.