Manufacturing Expands At Fastest Pace Since June

Published February 1, 2012 4:54PM (EST)

WASHINGTON (AP) — U.S. factories grew in January at the fastest pace in seven months, boosted by a rise in new orders. And builders ended a poor year for construction by spending more on homes and projects for the fifth straight month.

The reports bolster other data showing the U.S. economy started the year strong.

The Institute for Supply Management, a trade group of purchasing managers, said Wednesday that 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 manufacturing, which expanded for the 30th straight month.

Both new orders and order backlogs rose to nine-month highs. Increasing order backlogs suggest manufacturers are lacking the capacity to meet demand. That could mean more growth in production and employment in the near future, economists said.

Export orders also rose, a sign that U.S. manufacturers haven't yet been affected by Europe's slowing economy.

"This is a very encouraging report on manufacturing activity that shows particular strength in leading indicators," said John Ryding, an economist at RDQ Economics.

The report followed other healthy readings on manufacturing in China, Germany and the United Kingdom.

Growing global demand for factory goods sent markets higher. The Dow Jones industrial average jumped 141 points in morning trading. Broader indexes also rose.

"A raft of business surveys around the world ... have signaled a better than expected start to 2012 for many countries," said Chris Williamson, chief economist at Markit, a financial information provider.

Separately, the Commerce Department said spending on construction projects rose 1.5 percent in December, the fifth straight monthly gain. That pushed spending to a seasonally adjusted annual rate of $816.4 billion, the highest level in 20 months.

The gains coincide with other signs that show the troubled housing industry may be improving. Builders are more confident after seeing more interest in homes, and single-family home construction rose in the final three months of last year.

Still, the construction industry remains weak. Spending on all building projects in 2011 was just $787.4 billion. That's 2 percent lower than the previous year and roughly half the level economists consider healthy.

The best indication of the U.S. economy's health will come Friday, when the government reports on January hiring and unemployment.

Economists expect the economy added 155,000 net jobs, the seventh straight month of solid hiring. The unemployment rate is expected stay for the second month at 8.5 percent, near a three-year low.

Factories are still adding jobs but at a slower pace than in December, according to the ISM report.

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, economists are concerned that a key source of factory growth could wither in the coming months.

They note that a key reason the economy grew at an annual rate of 2.8 percent in the final three months of last year was that was companies restocked their supplies at a robust pace. That restocking is likely to slow in the first three months 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 have been weighed down by wages that haven't kept pace with inflation.

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

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