Expansion With Caveats: January Activity Jumps to 12.6 as Inventories Slide to -8.4

On the official release dated 2026-01-17, manufacturing “turned positive” with general activity at 12.6. That’s the headline. The fine print? Inventories cratered to -8.4 (lowest since July 2024), the average workweek shortened, and forward expectations cooled to 25.5, the lowest since July. Upbeat framing, mixed fundamentals.

Here’s what the data reveals:

• General activity swung from a revised -8.8 (December) to 12.6 (January); new orders rose to 14.4 and shipments to 9.5.

• Under the surface, inventories fell 17 points to -8.4 and the average workweek slipped from 12.5 to 9.1—not the footprint of a broad-based strengthening.

• Employment stayed positive at 9.7 but softened: the share reporting decreases jumped to 10% (from less than 1%), while “no change” fell to 70% (from 83%).

• Pricing divergence widened: prices paid fell to 46.9 (lowest since June) while prices received rose to 27.8—with firms citing “maintaining profit margins” (77) as their top pricing factor.

• The future general activity index fell to 25.5 (lowest since July), a material downshift in momentum despite “continued growth” language.

Narrative vs. numbers: the gaps that matter

The January print paints a textbook rebound in headline activity metrics—but the internals don’t fully corroborate a clean “expansion” story.

Headline strength meets inventory and hours weakness

• General activity surged +21.4 points to 12.6; new orders rose +9.0 to 14.4; shipments improved +6.0 to 9.5.

• At the same time, inventories fell -17.0 to -8.4 (lowest since July 2024), and the average workweek fell -3.4 to 9.1. Both typically signal caution.

Current conditions snapshot:

The combination of stronger new orders and falling inventories could set up a near-term restock—bullish for output in Q1 if orders stick. But shorter hours and softer employment breadth argue managements are hedging their bets rather than leaning into a sustained upcycle.

Employment: Positive, But Narrowing

The employment index stayed positive at 9.7, yet the distribution deteriorated:

• The share reporting decreases rose to 10% from less than 1%—a sharp deterioration in breadth.

• “No change” fell to 70% (from 83%), indicating more churn and less stability even as net hiring remains positive.

• Taken with a shorter workweek (9.1, down 3.4), firms appear to be conserving labor inputs while waiting for demand to prove out.

For investors, that mix typically means more operational leverage if demand holds—but also more revenue sensitivity if it doesn’t. Staffing flexibility cuts both ways.

Costs Ease, Prices Stick: Margin Math Is Back

This is the most consequential divergence in the report:

• Prices paid slipped to 46.9 (lowest since June)—input cost pressures are cooling.

• Prices received rose to 27.8—selling prices are still rising.

• Firms rank “maintaining profit margins” as the top pricing driver at a weighted 77, ahead of labor costs (75).

Special questions on 2026 cost expectations reinforce the story: input cost growth should slow, but compensation-driven costs will stay firm.

Net: corporations expect slower materials inflation but rising benefit costs—and they’re raising output prices anyway. That’s margin defense in action, and it suggests “good” disinflation may not fully pass through to final prices.

The Outlook Lost Altitude Despite the Spin

Forward-looking indicators softened meaningfully:

The outlook remains positive, but momentum is fading: the future general activity index at 25.5 is the weakest since July, and future new orders slipped 6 points. Interestingly, hiring plans and capex ticked up—suggesting firms are not capitulating, just tempering expectations. Future price indexes remain elevated (66.6 paid, 61.8 received), indicating pricing power is expected to persist.

Revisions That Quietly Rewrote December

Annual seasonal revisions (released January 8) reshaped the baseline:

• December current activity was revised from -10.2 to -8.8—less weak than initially reported.

• December future activity was revised from 41.6 to 38.1—less strong than first advertised.

That matters. January’s bounce to 12.6 looks slightly less heroic given a stronger revised base, while the downshift in future expectations was already underway before this month’s additional slide to 25.5.

What This Means for Markets

• Equities: Margin defense is alive. Sectors with pricing power and lower materials intensity—industrial tech, branded capital goods, specialty manufacturers—stand to benefit from the prices received up / prices paid down dynamic. Watch those with high benefits exposure: rising health costs (6.5% expected) could nibble at labor-intensive margins.

• Cyclicals: The inventory draw to -8.4 paired with stronger orders (14.4) is a classic restock setup. If orders hold, Q1/Q2 volume could surprise to the upside. If not, the shorter workweek and weaker breadth will cap upside. Be selective in industrials; favor firms signaling backlog durability and price discipline.

• Rates and inflation: Easing input costs argue for disinflation, but rising output prices and sticky future price expectations (61.8/66.6) complicate the last mile. This mix supports a cautious Fed rather than an aggressive easing narrative. Curves may re-steepen on stronger activity headlines; term premia sensitive to sticky margins.

• Credit: Inventory drawdowns can free working capital near-term, but restocking needs cash. Favor issuers with liquidity headroom and pricing power; avoid those with wage/benefit-heavy cost bases and weak pass-through.

• Positioning and hedges:

The punch line: January’s “expansion” is real—but so are the holes. Orders and shipments improved, yet inventories and hours tell a cautious story. Costs eased, but selling prices didn’t. For investors, the edge goes to companies that can keep raising prices as inputs cool. Follow the margin math, not the headline cheer.