January 5, 2010 in Business

Manufacturing report bodes well for economy

Numbers show industrial production likely to expand, spurring more hiring
Christopher S. Rugaber Associated Press
 
Associated Press photo

Kim Robinson puts labels on Playaway self-contained, battery-powered audio player books at the Findaway World headquarters in Solon, Ohio, last month.
(Full-size photo)

WASHINGTON – An unexpectedly strong report on manufacturing activity Monday bolstered confidence that the nation’s factories will help sustain an economic recovery.

The report helped boost stock markets on the first trading day of the year. The Dow Jones industrial average surged 156 points, or 1.5 percent.

The report by a private trade group signals that industrial production is likely to keep expanding in coming months, economists said. That could lead, in turn, to increased hiring and job creation.

The Institute for Supply Management, a trade group of purchasing executives, said its manufacturing index read 55.9 in December after 53.6 in November. A reading above 50 indicates growth.

It was the fifth straight month of expansion and the highest reading for the index since April 2006. Analysts polled by Thomson Reuters had expected a reading of 54.3.

But a separate report on construction spending sounded a more cautionary note. Construction activity fell in November for a seventh straight month as spending on both residential and commercial projects declined. The 0.6 percent drop was bigger than the 0.4 percent decline that economists had been expecting.

Increased spending on federal construction projects, likely fueled by stimulus spending, was largely canceled out by lower state and local construction spending.

Still, the ISM said its index of new orders, a signal of future production, jumped last month to 65.5 from 60.3 in November, the highest level in five years. That indicates the overall index should keep climbing and could near 60 in coming months, economists said.

The index’s peak in the last decade was 61.4 in May 2004. It bottomed at 32.9 in the midst of the recession in December 2008.

“Overall, this was a very strong report, and it suggests that the recovery in the U.S. manufacturing sector is gaining further traction,” Millan Mulraine, an economist at TD Securities, wrote in a note to clients.

The ISM survey showed that inventories held by manufacturers’ customers are still declining and are at their lowest level since the survey began tracking the category in January 1997. That’s another sign of future gains because more sales will have to be filled through new production rather than existing stockpiles.

That could lead to increased hiring as manufacturers ramp up production. And a turnaround in employment could boost incomes and increase consumer spending, fueling the recovery.

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