Data released on Tuesday showed the ISM Manufacturing Index dropped 1.2 to 57.6 in January, below 57.5 of market consensus. Analysts at Wells Fargo point out that despite these headwinds, the ISM manufacturing report continued to signal incremental thawing of supply problems. They expect activity to remain strong.

Key quotes:

“While current activity was weaker amid a 1.2 point drop in the production component, the 3.1 point decline in new orders suggests some pullback in demand as well. The declines in January brought both of these components to their lowest levels in over a year and a half, signaling weaker activity in the sector.”

“The third consecutive monthly decline in the ISM manufacturing index in January signals weaker but still-strong activity in the sector. But, we believe this weakness will partly be temporary. The Omicron variant has shown some signs of subsiding just as fast as it appeared. New daily cases seem to have peaked and the national hospitalization rate looks to have rolled over. Further, even if demand continues to subside in the near-term as the service sector gains more considerable momentum, the expansive backlog of orders means manufacturers will be busy with plenty of product to still deliver on.”