The U.S. manufacturing sector surprisingly returned to expansion in January, signaling renewed business optimism, though mounting input costs pose a growing inflation risk for the months ahead.

Two key indicators tracking U.S. factory activity that were released Monday showed stronger-than-expected growth last month.

The S&P Global U.S. Manufacturing PMI was upwardly revised to 51.2, exceeding the preliminary estimate of 50.1 and improving from 49.4 in December.

The ISM Manufacturing PMI rose to 50.9 from a downwardly revised 49.2 in December, beating market forecasts of 49.8, according to TradingEconomics. This marked the first expansion in the ISM index after 26 consecutive months of contraction.

Manufacturing Activity Surges In January

"The start of the new year saw a renewed expansion in the U.S. manufacturing sector amid a surge in confidence," S&P Global wrote in its report.

The firm attributed part of the optimism to expectations that business conditions would improve under President Donald Trump‘s administration.

"Business confidence about prospects for the year ahead has leaped to the highest level in nearly three years after one of the largest monthly gains yet recorded by the survey," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

While manufacturing activity rebounded, rising input costs threaten to push consumer price inflation higher in the months ahead. Costs continued to increase sharply, driving the pace of output price inflation to its highest level since May 2024.

"A rise in the rate of increase of both input costs and selling prices could become a concern if this intensification of inflationary pressures is sustained in the coming months," Williamson stated.

"Especially as the combination of higher price pressures alongside accelerating economic growth and rising employment is not typically conducive to cutting interest rates," he added.

A separate ISM survey reinforced these concerns, with its Prices Paid Index climbing 2.4 points from December to 54.9, the highest since May 2024, exceeding market expectations of 52.6.

Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, highlighted that price pressures would be a significant challenge throughout 2025.

"As predicted, maintaining a slower rate of price increases as demand returns will be a major challenge for 2025," Fiore said.

The ISM report also highlighted that companies in the Food, Beverage & Tobacco Products industry are actively assessing supply chain adjustments in response to potential tariff-driven cost increases.

Market Reactions: Stocks Drop, Bonds And Gold Rally

Markets reacted negatively to the confirmation of new tariffs on Canada and Mexico at 25% and China at 10% announced by Trump over the weekend.

By 10:30 a.m. ET, the S&P 500 — tracked by the SPDR S&P 500 ETF Trust — was down 1.2%.

Treasury yields declined, signaling demand for safe-haven assets. The yield on the 30-year Treasury bond dropped 5 basis points to 4.75%, pushing the iShares 20+ Year Treasury Bond ETF up 0.7%.

Gold prices surged to fresh all-time highs, with spot gold reaching $2,800 per ounce, while the SPDR Gold Trust rose 0.7%, reflecting heightened investor concerns over inflation and economic uncertainty.

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