US factory activity slowed in January amid a fall in new orders, but an unexpected drop in the number of Americans filing for unemployment benefits last week pointed to sustained labour market strength that should underpin domestic demand. The economy's healthy fundamentals were also underscored by other data on Thursday showing a solid increase in construction spending in December. A decline in worker productivity in the fourth quarter, however, suggested it may be hard to maintain the strong pace of economic growth.
The Institute for Supply Management (ISM) said its index of national factory activity fell to a reading of 59.1 last month from 59.3 in December. A reading above 50 in the ISM index indicates growth in manufacturing, which accounts for about 12 percent of the US economy.
The survey's production and employment sub-indexes fell in January as did a gauge of new orders. The moderation in orders is likely to be temporary against the backdrop of strong domestic and global demand. Manufacturers reported an increase in export orders and most offered an upbeat assessment of business conditions.
Manufacturers of computer and electronic products said "budgets are being approved for new projects." Furniture manufacturers reported that "our usual winter slowdown has not occurred, and we are very busy with new orders." The ISM survey also showed signs of a pickup in inflation, with a measure of prices paid by factories for raw materials increasing to its highest level since May 2011.
In a separate report, the Labor Department said initial claims for state unemployment benefits slipped 1,000 to a seasonally adjusted 230,000 for the week ended January 27. Economists polled by Reuters had forecast claims rising to 238,000 in the latest week.
Last week marked the 152nd straight week that claims remained below the 300,000 threshold, which is associated with a strong labour market. That is the longest such stretch since 1970, when the labour market was much smaller.
The labour market is near full employment, with the jobless rate at a 17-year low of 4.1 percent. A tightening of labour market conditions has raised optimism among Fed officials that inflation will rise towards the US central bank's 2 percent target this year.
The claims data has no bearing on January's employment report, which is scheduled to be released on Friday, as it falls outside the survey period. According to a Reuters survey of economists, nonfarm payrolls probably rose by 180,000 jobs in January after increasing by 148,000 in December.
In a third report on Thursday, the Labour Department said nonfarm productivity, which measures hourly output per worker, fell at a 0.1 percent annualized rate in the fourth quarter. That was the first drop and weakest performance since the first quarter of 2016 and followed a 2.7 percent pace of increase in the third quarter.
Compared to the fourth quarter of 2016, productivity increased at a rate of 1.1 percent. It rose 1.2 percent in 2017, the fastest since 2015, after dipping 0.1 percent in 2016. Soft productivity suggests it would be hard for the economy to hit the Trump administration's 3 percent annual growth target even with the $1.5 trillion tax cut package passed by Congress in December. Gross domestic product rose 2.3 percent in 2017.
Unit labour costs, the price of labour per single unit of output, rose at a pace of 2.0 percent in the final three months of 2017 after slipping at a rate of 0.1 percent in the third quarter. They gained 0.2 percent in 2017, the smallest increase since 2010, after rising 1.1 percent in 2016.