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Activity in the US manufacturing sector expanded in January, although at a more moderate pace than in December. The ISM manufacturing index fell sharply to 51.3 from 56.5. The decrease in the gauge of manufacturing activity in January was larger than the decline to 56.0 expected by markets going into today's report.

The moderation in the headline ISM index in January reflected broad-based declines across the main components. Growth in new orders moderated sharply with the sub-index down 13.2 points to an eight-month low of 51.2. Current production fell by a more modest 6.9 points to 54.8 from 61.7 in December. Supplier delivery rose to 54.3 from 53.7 in the previous month, indicating that shipments from suppliers were slower (delivery times tend to lengthen as suppliers face more capacity constraints). The pace at which firms were running down their inventories increased in January as the inventory change component fell 3.0 points to 44.0. With respect to inflation, the prices paid component jumped to 60.5 in January from 53.5 in December, marking the second consecutive month of increasing price gains. Finally, the employment sub-index fell to 52.3 from 55.8 in December, the sharpest drop since November 2012 and indicating a slowing in hiring by manufacturing firms to start the year.

Manufacturing activity in the US expanded for the eighth consecutive month in January, although the pace of increase moderated sharply to start the year. While the January report on manufacturing activity is disappointing, with the headline index now sitting at an eight-month low, the report accompanying today's release stated that a number of survey respondents cited adverse weather conditions as "a factor negatively impacting their businesses in January". Beyond the weather impact, several respondents' comments were cautiously supportive of further gains in activity, with mentions including "seeing slight improvements... across most regions and business segments" and "cautiously optimistic about increasing volumes". While the sharp deterioration in the spread between the new orders and inventory change components (considered a key indicator of future activity) suggests some near-term restraint for manufacturing activity is possible, we expect this weather-related slowdown to be short-lived. We anticipate that continued gains in manufacturing activity will support an above-potential pace of economic growth in 2014; however, we expect some retracement in earlier outsized inventory gains will temper this strength, with GDP growth moderating to a 2.3% pace in Q1/14 from 3.2% in the Q4/13.

In a separate release, construction spending in the US rose by 0.1% in December, beating market expectation for a 0.1% decline. The increase was concentrated entirely in the private sector (+1.0%) with the residential investment component rising (+2.6%) to build on a 1.1% gain in November while non-residential private spending declined (-0.7%) to partially offset a 2.4% rise in the previous month. Public construction expenditure declined (-2.3%) as both residential and non-residential investment components decreased (-11.5% and -2.1%, respectively).

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