PMI Hits a Two-Year High; Weak Global Growth Is Still a Challenge

In a potentially brighter sign for a slow-growing, stressed U.S. manufacturing sector, the Institute for Supply Management reported that its widely followed Purchasing Managers' Index rose to a two-year high in December. This critical leading index of manufacturing growth has been strengthening consistently since September even as actual manufacturing output data remain distressingly weak, preventing the U.S. factory sector from achieving a full recovery from the Great Recession.
The index components in the December report were mostly positive, with new orders and production both strengthening significantly. By contrast, the backlog of orders remains in a slight contraction mode, suggesting that orders momentum and strength have yet to accumulate enough to create growth-enhancing pressure on production schedules.
The broad economic backdrop remains mixed for the factory sector. Financial instabilities have receded, deflation pressures are less of a concern, and the worst of a number of emerging market crises appear to have passed.
Nonetheless, sluggish global growth, a more than decade high on the dollar, and weak capital spending have not receded as challenges for U.S. goods producers. These difficulties are not likely to fully abate in the near term.
While much will depend on the content and timing of any new policy programs, the most likely short-term story for U.S. manufacturing will be one of still subpar, if somewhat firmer and more consistent, output gains.