U.S. Manufacturing Rebounds; Boeing, Coronavirus Loom

U.S. factory activity unexpectedly rebounded in January after contracting for five straight months amid a surge in new orders, offering hope that a prolonged slump in business investment has probably bottomed out.

A rebound in business investment is critical to keeping the longest economic expansion in history, now in its 11th year, on track amid signs of fatigue in consumer spending. The improvement in manufacturing reported by the Institute for Supply Management (ISM) Monday likely reflected an ebb in trade tensions between the United States and China.

But manufacturing, which accounts for 11% of the U.S. economy, is not out of the woods. ✈️Boeing <BA.N> last month suspended production of its troubled 737 MAX jetliner, grounded last March following two fatal crashes. The coronavirus, which has killed hundreds in China and infected thousands globally, could disrupt supply chains, especially for electronics producers.

“A first step toward de-escalation in the trade war certainly helped,” said Tim Quinlan, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. “We are only beginning to understand the potential effects of the 🦠Coronavirus Outbreak and what it means for supply chains.”

The ISM said its index of national factory activity increased to a reading of 50.9 last month, the highest level since July, from an upwardly revised 47.8 in December.

A reading above 50 indicates expansion in the manufacturing sector. The ISM index had held below the 50 threshold for five straight months. Economists polled by Reuters had forecast the index rising to 48.5 in January from the previously reported 47.2 in December.

Washington and Beijing signed a Phase 1 trade deal last month. The deal, however, left in place U.S. tariffs on $360 billion of Chinese imports, about two-thirds of the total, which economists say will remain a constraint on manufacturing.