Declines in the US manufacturing sector appear to have bottomed in a positive sign for the economy.
On Thursday, the January ISM Manufacturing PMI index registered a reading of 49.1 percent, up from 47.1 percent in the month prior and above Wall Street's estimates for a reading of 47.2. While that's lower than the reading of 50 needed to signal expansion in the sector, the reading was the strongest since October 2022.
Additionally, the ISM's new orders index increased to 52.5 from 47.1 in the month prior. Economists had expected the index to hit 48.2 in January.
"The solid rebound in the ISM manufacturing index ... indicates that the downturn in the sector is fading and appears to justify the Fed’s view that it can wait a little longer before cutting interest rates," Capital Economics deputy chief US economist Andrew Hunter wrote in a note to clients on Thursday.
The positive read on activity comes a day after Federal Reserve Chair Jerome Powell said the US economy has been expanding at "a solid pace." Powell indicated during the press conference that this gives the central bank more time to keep interest rates higher while waiting for more confirmation on inflation's path downward.
“We feel like inflation is coming down,” Powell said. “Growth has been strong. The labor market is strong.”
Powell highlighted a recent reading on fourth quarter gross domestic product, which showed the economy grew at an annualized rate of 3.3% in the final three months of 2023. Compared to the fourth quarter in 2022, real GDP grew 3.1% in the fourth quarter.
Other economic data has come in strong, too. Data from the S&P Flash PMI released last month showed economic output hit its highest level in seven months in January. This comes as consumer spending has remained resilient and the labor market has remained intact.
When asked if strong economic growth remains a key risk to keeping inflation above the Fed's target, Powell said that's no longer a chief concern.
"We don’t look at it as a problem," he said. "I think at this point we want to see strong growth. We want to see a strong labor market. We’re not looking for a weaker labor market. We’re looking for inflation to continue to come down, as it has been coming down for the last six months."
Not everyone saw Thursday's manufacturing data as entirely positive. Wells Fargo economists Shannon Seery Grein and Tim Quinlan indicated in a note to clients that the ISM release "highlights the resilience paradox."
While manufacturing showed signs of a rebound, the release also included other less encouraging signs. The prices index, a potential indicator of inflation, increased to 52.9 in January from 45.2 in the month prior. Meanwhile, employment fell to a reading of 47.1, down from 48.1 the month prior.
Rising prices and shrinking payrolls put the Fed "in a jam," the team of Wells Fargo economists wrote.
"Policymakers are coming to grips with an economy so resilient it risks interrupting the downward trend in inflation," Wells Fargo's economists wrote.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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