US business activity picks up as manufacturing gauge hits record high, IHS Markit says

• IHS Markit's gauge of US business activity rose to a two-month high of 58 in January from 55.3.
• The firm's index for the manufacturing index hit a record high of 59.1 amid strong improvements in output and new orders.
• The services sector also improved but remained pressured by COVID-19 lockdowns and rising input costs.

A key gauge of US business activity swung higher this month as strong demand lifted manufacturers and service businesses alike.

IHS Markit's composite output index climbed to 58 from 55.3 in an early January reading, hitting its highest level in two months. The firm's index of service-industry business activity improved to 57.5 from 54.8, while its purchasing managers' index for manufacturers leaped to a record high of 59.1 from 57.1.

Readings above 50 signal growth and those below the threshold indicate contraction. IHS's composite PMI plummeted below 30 at the start of the pandemic but has remained at elevated levels for months as stimulus and steady reopenings lifted activity.

Manufacturers drove the bulk of the composite index's climb as expansions in output and new orders boosted the industry. An index of manufacturing output leaped to a 77-month high of 60.5 from 58.3. Export activity rose at the fastest rate since 2014, though supply chain disruptions and material shortages prevented an even larger improvement.

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"Capacity constraints are biting amid the growth spurt," Chris Williamson, chief business economist at IHS Markit, said in a statement, adding that the supply-and-demand imbalance presents a notable near-term risk.

The service industry's gauge was largely lifted by rising consumer demand. The pace of business growth still weakened as state and city governments imposed new economic restrictions to curb the coronavirus's spread, IHS said.

Higher transportation and PPE costs pushed input prices higher for service businesses. Some firms will pass on such costs to customers, but concerns over competition will likely see many businesses absorb the higher input costs, IHS added.

Business optimism across the service and manufacturing industries remained strong due to hopes for eventual reopenings and vaccine distribution, according to the report.

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