Could coronavirus spoil the rebound in US factory activity?

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The bounce-back in factory activity raised hopes that a prolonged slump in United States business investment has likely bottomed out

Could coronavirus spoil the rebound in US factory activity?

US manufacturing activity bounced back in January, but coronavirus and Boeing woes could spell trouble ahead.

Activity at factories in the United States staged a surprise rebound in January, as a surge in new orders helped break a five-month-long contraction streak.

While the bounce-back raised hopes that a prolonged slump in business investment has likely bottomed out, headwinds from Boeing's 737 MAX troubles and the coronavirus outbreak could spoil the turnaround.

A rebound in business investment is critical to keeping the longest economic expansion in US history on track as consumer spending - the engine of US economic growth - shows signs of fatigue.

The improvement in manufacturing reported by the Institute for Supply Management (ISM) on Monday likely reflected a break in trade tensions between the US and China after the two countries signed a phase one trade deal last month.

But manufacturing, which accounts for 11 percent of the US economy, is not out of the woods. Boeing last month suspended production of its troubled 737 MAX jetliner, which was grounded last March following two fatal crashes. And the coronavirus outbreak, 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."

Economists estimate that Boeing's biggest assembly-line halt in more than 20 years could slice at least half a percentage point from first-quarter US economic growth, while the coronavirus could hurt global growth, which has been stabilising after declining since mid-2018.

"The production cuts at Boeing could yet weigh on the hard data at the start of this year," said Andrew Hunter, a senior US economist at Capital Economics in London. "The likely hit to manufacturing activity in China from the coronavirus shutdown could also become a headwind for US producers, particularly those reliant on intermediate parts from China."

The ISM said its index of national factory activity increased to a reading of 50.9 last month, the highest level since July.

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 news agency had forecast the index rising to 48.5 in January from the previously reported 47.2 in December.

Washington and Beijing signed a phase one trade deal last month, but it left in place US tariffs on $360bn of Chinese imports, about two-thirds of the total, which economists say will remain a constraint on manufacturing.

The ISM said, "global trade remains a cross-industry issue, but many respondents were positive for the first time in several months."

The survey's forward-looking new orders subindex jumped to a reading of 52.0 last month, the highest since May.

A measure of exports orders raced to the highest level since September 2018, while a gauge of imports touched levels not seen in 11 months. Manufacturers also reported paying more for raw materials and other inputs. The survey's measure of prices paid hit its highest level in 10 months, suggesting some build-up of inflation pressures at the factory level.

The US Federal Reserve held interest rates unchanged at the end of its two-day policy meeting last week and could keep monetary policy on hold at least through this year. Fed Chair Jerome Powell told reporters that while purchasing managers' indexes in many jurisdictions of the manufacturing sector had moved up off of their lows, "I would just say none of this is assured."

The 18-month-long US-China trade war has pressured business confidence and undercut capital expenditure. Business investment contracted in the fourth quarter for the third straight quarter, the longest such stretch since 2009.