Business

Manufacturers shrug off government shutdown, keep expanding

WASHINGTON -- What government shutdown?

That's what one might conclude from Friday's surprisingly upbeat report on U.S. factory activity: The closely followed ISM manufacturing index edged up in October to 56.4 -- the highest reading in 2 1/2 years.

Analysts were expecting the index, based on surveys of 400 purchasing managers, to show a drop from September as the 16-day partial federal shutdown and political brinkmanship over the debt ceiling heightened uncertainty, if not fears, about the economy. But the latest reading from the Institute for Supply Management marked the fifth straight month of increase and the highest since April 2011.

The details of the report were mixed. The figure on new orders, the most forward-looking element of the index, inched up to 60.6, with export orders showing a strong gain over the month. The employment component, however, dropped to 53.2 last month from 55.4 in September. And production also tailed off a bit. All the readings were comfortably above 50, the threshold separating expansion from contraction. 

All in all, the ISM report was one of the most encouraging pieces of economic news in the wake of the government shutdown. It suggests that economic output in the fourth quarter could be better than the forecasts for anemic performance.

That could mean stronger job growth, which, if it materialized, could spur the Federal Reserve to start reducing its bond-buying stimulus at its meeting next month, instead of waiting until next year, as many economists are expecting.

Some analysts viewed the latest ISM data cautiously. The ISM reports have tended to paint a more optimistic picture of U.S. manufacturing than the Fed's monthly industrial production data, wrote Cliff Waldman, senior economist for Manufacturers Alliance for Productivity and Innovation.

With the Euro zone starting a slow recovery and China's economy firming up -- Beijing said Friday that China's manufacturing picked up last month -- the stronger global outlook should provide a boost for American manufacturers, Waldman said. But he doesn't think manufacturers brushed aside the federal shutdown, either.

Other economists were more heartened by Friday's ISM report.

"The outlook for manufacturing looks far more constructive now than it did over the past several months in light of the improving global backdrop," said Michael Dolega, an economist at TD Bank. In a note to clients, he added: "Things would look all the better should Washington manage to keep out of the headlines."

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