Manufacturing Expands At Fastest Pace Since June

Published February 1, 2012 3:18PM (EST)

WASHINGTON (AP) — U.S. factories grew in January at the fastest pace in seven months, boosted by a rise in new orders. The report bolsters other data showing the U.S. economy started the year strong.

The Institute for Supply Management, a trade group of purchasing managers, says its manufacturing index rose last month to 54.1 from 53.1 in December. Readings above 50 indicate expansion.

Consumers are buying more cars and trucks, while businesses ordered more machinery and other equipment. That has driven factory output. The sector has expanded for 29 straight months, according to the index.

A measure of hiring dipped, indicating factories are still adding jobs but at a slower pace than in December. Export orders also rose, a sign that U.S. manufacturers haven't yet been affected by Europe's slowing economy.

Manufacturing output has jumped in recent months. Auto sales have rebounded from the spring, when Japan's earthquake disrupted supply chains and fewer cars were available on dealer lots.

Businesses also ordered more big-ticket manufactured items in December, the government said last week. And orders for so-called core capital goods, which are a good measure of businesses' investment plans, reached an all-time high last month.

Factory output rose in December by the most in a year, according to the Federal Reserve. Production rose for goods used in the early stages of manufacturing, such as metals, wood products and construction materials. That suggests the output of finished goods will pick up.

Still, U.S. factories are vulnerable to economic shocks.

Exports are likely to decline if Europe suffers a recession, as many predict.

And the key reason the economy grew at an annual rate of 2.8 percent in the final three months of last year was that companies restocked their warehouses. That kept helped drive factory output at the end of last year.

Most economists say that restocking is certain to slow in the first quarter of this year.

Unless consumer spending picks up, businesses won't be able to sell off that extra inventory, and may have to cut back on future orders.

Consumers increased their spending only 2 percent in the final three months of last year. Many have been weighed down by wages that haven't kept pace with inflation.

They need more jobs and higher pay. Hiring has picked up in recent months, but the unemployment rate is still high, at 8.5 percent.

Business spending on equipment and software rose in the final three months of last year, but at the slowest pace since the recession ended, the government said last week.

Most economists expected the combination of weaker inventory growth and tepid consumer spending will lead to slower growth in the January-March quarter. Many are predicting just 2 percent annualized growth in that stretch.

By Salon Staff

MORE FROM Salon Staff

Related Topics ------------------------------------------