A Record-Breaking January Jump
Last Friday, we got the January Manufacturing Business Outlook Survey from the Philadelphia Fed, and to say the numbers were eye-popping would be an understatement. The data, collected from January 6 to January 13, showed such a remarkable turnaround in manufacturing activity that it demands closer scrutiny – particularly given the political context we’re operating in.
Let’s dive into the numbers first. The headline index for general activity (“current activity”) skyrocketed from -10.9 in December to 44.3 in January – marking the largest monthly increase since June 2020 and reaching its highest level since April 2021. To put this in perspective, nearly 51% of firms reported increases in activity (up dramatically from just 19% last month), while only 7% reported decreases (down from 30%). The rest – 41% – reported no change.
Broad-Based Strength Across Indicators
The survey showed broad-based strength across multiple indicators:
- New orders surged by 47 points to 42.9, hitting levels not seen since November 2021
- Shipments rose 39 points to 41.0, reaching their highest mark since October 2020
- The employment index increased by 7 points to 11.9, with 87% of firms maintaining stable employment levels
- The average workweek index turned positive, jumping to 20.3 – its highest reading since March 2022
The Trump Effect or Something Else?
Now, here’s where things get interesting. The conventional wisdom might suggest this is a manifestation of “Trump optimism” – a business confidence boost following recent political developments.
However, I’m not entirely convinced by this explanation. The timing feels off – why didn’t we see any of this enthusiasm in the December numbers, when the political situation was already clear?
Instead, I suspect we’re seeing something more pragmatic at work: tariff anticipation. With Trump’s well-documented plans for massive increases in tariff rates, American manufacturing companies appear to be preparing for a very different trade environment.
If you’re a manufacturer using components from Canada, Mexico, China, or Europe, and you know these inputs might soon face significant tariffs, the logical move would be to stock up now, before the tariffs kick in.
Price Pressures and Future Expectations
The price data adds another layer to this story. Both price indices have risen above their long-run averages:
- The prices paid index increased to 31.9 (highest since December 2022)
- The prices received index jumped dramatically by 24 points to 29.7 (highest since January 2023)
- 36% of firms reported increases in input prices
- 35% reported raising their own prices (up sharply from just 9% last month)
The survey’s special questions about cost expectations for 2025 are particularly telling. While firms expect smaller cost increases for 2025 compared to 2024, they ranked demand for their goods/services as the most important factor in setting prices, followed by maintaining steady profit margins and labor costs.
Looking ahead, the future indicators paint an intriguing picture. The future activity index rose to 46.3, with 54% of firms expecting increased activity over the next six months. The future new orders index climbed to 57.3, and the future shipments index hit 60.2 – its highest reading since July 2021. The future employment index reached 40.4, suggesting continued hiring plans.
A Fed Policy Dilemma in the Making
For the Federal Reserve, this creates a particularly thorny problem. The combination of strong current activity, rising prices, and healthy employment would typically argue for maintaining tight monetary policy. But if this surge in activity is largely driven by tariff anticipation, it could prove temporary – potentially followed by a significant slowdown once new trade barriers are implemented.
The Bottom Line: Don’t Get Too Excited Yet
All things considered, while these numbers are impressive, they may be more a reflection of businesses adapting to potential policy changes than a signal of sustainable economic acceleration.
American businesses appear to be taking a “better safe than sorry” approach – building inventories and making preparations now rather than facing higher costs later. And given the stakes involved, who can blame them?
If I’m right about this interpretation, we should expect to see similar patterns in other U.S. economic data in the coming months – not so much in terms of future optimism, but in current activity levels and especially inventory building. And when the tariffs are actually implemented, we might see a corresponding or even larger dip in activity.
If you want to know more about my work on AI and data, then have a look at the website of PAICE — the AI and data consultancy I have co-founded.