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US business activity growth nears 6-year high as manufacturing index hits record

Business activity in the U.S. private sector expanded in January at the second-fastest pace in nearly six years as positive developments on the coronavirus vaccines and the arrival of President Joe Biden's administration lifted optimism, although inflationary pressures also intensified amid capacity constraints, according to new survey data from IHS Markit.

The IHS Markit Flash U.S. Composite Purchasing Managers' Index Output Index, which is a weighted average of manufacturing output and business activity in the service sector, rose to 58.0 in January from 55.3 in December. An index reading above 50.0 indicates expansion.

The consensus estimate of economists polled by Econoday was for an index reading of 55.5.

"Rates of expansion in business activity accelerated at manufacturers and service providers, with goods producers registering the sharpest upturn in output since August 2014," IHS Markit said.

The Flash Manufacturing Purchasing Managers' Index hit a record high, rising to 59.1 from 57.1. The Flash Manufacturing Output Index climbed to a 77-month high of 60.5 from 58.3. The Flash U.S. Services Business Activity Index also improved to 57.5 from 54.8.

Private sector firms indicated a "renewed and solid rise" in new export orders in January, IHS Markit said. However, the overall rate of new business growth eased compared with December as service providers indicated slower growth in new orders due to a recent surge in COVID-19 cases and tighter restrictions on business operations.

"U.S. businesses reported a strong start to 2021, buoyed by hopes that vaccine developments will mean the worst of the pandemic is behind us, and that the new administration will provide a stable and supportive environment for stronger economic growth," said IHS Markit chief business economist Chris Williamson.

However, IHS Markit warned of heightened inflationary pressures, saying input costs rose at the fastest pace on record amid supplier delays and shortages.

"[C]apacity constraints are biting amid the growth spurt. Not only have the last two months seen supply shortages develop at a pace not previously seen in the survey's history, but prices have also risen due to the imbalance of supply and demand," Williamson said, adding that input cost inflation subsequently lifted the average selling prices for goods and services.

Williamson also flagged the weakest employment reading since July, a result of rising costs and the pandemic's impact on the demand for consumer-facing services.

IHS Markit is subject to a merger with S&P Global pending regulatory and other customary approvals.