U.S. factory activity accelerated to a five-month high in November amid a pickup in new orders and production, suggesting that the manufacturing sector was regaining its footing after a prolonged slump.
Thursday’s report from the Institute for Supply Management (ISM), which also showed some bottlenecks in the supply chain that could drive prices higher, was the latest indication that the economy continued to gain momentum in the fourth quarter.
The ISM said its index of national factory activity rose 1.3 percentage points to a reading of 53.2 last month, the best since June. A reading above 50 indicates an expansion in manufacturing, which accounts for about 12 percent of the U.S. economy.
“The factory sector has started to show some building momentum, strengthening the case for Federal Reserve action at the December policy meeting,” said Kevin Cummins, senior economist at RBS in Stamford, Connecticut.
Manufacturing is recovering as some of the drag from the dollar’s past rally eases and oil prices continue to stabilize after last year’s collapse. Gains in factory activity are, however, likely to be modest amid renewed dollar strength following the election of Donald Trump as the next president.
Since the Nov. 8 election, the dollar has surged more than 4 percent against the currencies of the United States’ main trading partners as investors viewed the president-elect’s proposed fiscal policy as inflationary.
But Trump’s plan to increase infrastructure spending could offer some boost to manufacturing and benefit heavy machinery makers such as Caterpillar (CAT.N), whose profit has been hurt by poor demand for construction equipment.
Last month, the ISM production sub-index increased 1.4 percentage points and a gauge of new orders rose 0.9 percentage point. While a measure of factory employment fell last month, manufacturing payrolls remained above expansion territory.
The ISM survey also showed bottlenecks starting to emerge, with a measure of supplier deliveries surging 3.5 percentage points last month to its highest reading since December 2014, indicating longer delivery delays.
Manufacturers who participated in the ISM survey reported increasing demand, some tightness in the labor market and plans to reduce inventory by the end of the year.
“While we are gaining confidence that the manufacturing sector is starting to improve, the recent dollar appreciation may prove to be a headwind for the sector over time,” said Daniel Silver, an economist at JPMorgan in New York.
The dollar was trading lower against a basket of currencies on Thursday. Prices for U.S. government bonds also fell as did stocks on Wall Street.