US financial markets reacted closely today to the release of the Flash Manufacturing PMI for January, published just over an hour ago, as the data offered fresh insight into the balance between economic resilience, slowing demand, and persistent inflation pressures. The latest figures from S&P Global signaled that business activity at the start of 2026 remains in expansion territory, with manufacturing showing renewed momentum even as employment growth and export demand remain subdued.
The Flash US Manufacturing PMI edged up to 51.9 in January from 51.8 in December, marking a two-month high and confirming continued improvement in factory business conditions. More notably, the Manufacturing Output Index jumped to 54.8, its strongest reading in five months, pointing to a clear acceleration in production. In contrast, services activity remained steady, with the Flash Services PMI Business Activity Index unchanged at 52.5, while the Flash US Composite PMI Output Index rose slightly to 52.8, a two-month high. Together, the data reinforced the view that overall US business output continues to expand, albeit at a slower pace than seen during the stronger growth phase in the second half of 2025.
Manufacturing Outperforms Services as Production Accelerates
A key takeaway from the January flash PMI was the outperformance of manufacturing relative to services. Factory output recorded its strongest expansion since August, making manufacturing the primary driver of the marginal improvement in overall business activity. Market participants viewed this as a positive signal for industrial production, capital goods demand, and cyclical sectors tied to manufacturing strength.
However, beneath the headline improvement, the data revealed softening underlying demand, particularly in new orders. While manufacturing new orders returned to growth after declining in December, the pace was modest, suggesting that demand for goods remains weaker than the levels typically seen throughout 2025. Services firms reported a pickup in new business compared with December, but growth remained below long-term averages, reinforcing concerns that demand momentum is cooling rather than accelerating.
Export demand emerged as a notable weak spot. The survey showed the largest drop in overall new export orders since April 2025, driven by a sharp decline in goods exports and the steepest fall in services exports since November 2022. This trend raised caution among investors about the external demand outlook, particularly against the backdrop of geopolitical uncertainty and ongoing trade frictions.
Employment Stalls, Inventories Rise, Capacity Pressures Build
From a labor market perspective, the flash PMI suggested that employment growth remains fragile. Overall job creation was little changed in January, reflecting companies’ hesitancy to expand payrolls amid rising costs and slower sales growth. Manufacturing employment growth slipped to a six-month low, while service sector hiring posted only marginal gains. Some firms continued to report difficulties finding suitable workers, contributing to capacity constraints.
These capacity issues were reflected in a rise in backlogs of work, the largest increase since August, though mainly concentrated in the services sector. Meanwhile, manufacturers reported a further increase in finished goods inventories, marking the eighth rise in the past nine months. While January’s inventory build was the smallest since July, inventory growth remains historically strong, a development markets often interpret as a sign of cautious demand expectations or supply-demand mismatches.
Input buying, however, rose at the fastest pace since June, as firms increased purchases to meet production needs. Input inventories overall were unchanged, suggesting that companies remain cautious about over-accumulating stock despite stronger output.
Inflation Signals Keep Markets on Alert
Price pressures were a central focus for financial markets following the release. Input cost inflation remained elevated in January, though it moderated slightly from December’s seven-month high. The moderation was driven by cooling cost pressures in the service sector, while manufacturing input prices rose at the fastest pace since September, frequently attributed to tariffs and higher raw material costs.
Selling prices continued to rise across both goods and services. Although the pace of price increases eased slightly from December, January’s reading remained among the strongest seen over the past three years. Factory gate prices climbed to a five-month high, reinforcing concerns that tariff-related costs are being passed on to customers. For investors, this combination of resilient output and sticky inflation complicates the outlook for monetary policy.
Market Impact and Policy Implications
Financial markets interpreted the flash PMI as growth-supportive but inflation-challenging. The acceleration in manufacturing output supported equity sentiment in industrial and cyclical sectors, while persistent price pressures limited downside moves in bond yields as investors reassessed the timing of potential interest rate cuts. The data reinforced the view that the Federal Reserve may need to remain cautious, as economic activity continues to expand even as inflation risks linger.
Business confidence remained positive but edged slightly lower, reflecting a balance between optimism about domestic demand and concerns over political uncertainty, tariffs, and rising prices. Manufacturers expressed greater confidence than service providers, with optimism in the factory sector rising to a seven-month high.
Bottom Line
The January Flash Manufacturing PMI painted a picture of a US economy that is still growing, increasingly driven by manufacturing strength, but facing headwinds from softening demand, weak exports, and persistent cost pressures. For financial markets, the report reinforced expectations of steady, but uneven growth in early 2026 and underscored why upcoming PMI releases, inflation data, and policy signals will remain critical drivers of market direction in the weeks ahead.
