Manufacturing Activity Finally Starts to Perk Up
U.S. manufacturing activity grew for the first time in a year and a half, an industry report showed Friday, signaling that the sector may have emerged from its deep recession.
The Institute of Supply Management’s manufacturing index rose to 54.7 last month, a stronger-than-expected increase that marked the first time since July 2000 that the measure has entered positive territory.
A reading above 50 signals expansion in the nation’s factories. February’s increase marks the fourth consecutive month of growth in the index, which stood at 49.9 in January. Fourteen out of 20 industries reported growth in the latest report, including producers of high-tech goods such as computers and electronic components.
“The growth was broad-based ... and new orders were particularly strong,” said Norbert J. Ore, head of ISM’s Business Survey Committee. “I think the first quarter is going to be better than anyone anticipated.”
Separately, government figures Friday showed that U.S. personal spending rose 0.4% in January, as consumers continued to do their part.
Steady consumer spending has been a lifeline for the U.S. economy over the last year, and one of the reasons economists are predicting the recent recession will prove one of the briefest and mildest on record.
Personal income also rose 0.4% in January, the biggest rise in six months.
And in yet another report released Friday, the Commerce Department said U.S. construction spending rose 1.5% in January. That was the heftiest increase in a year, thanks to mild weather, continued low mortgage interest rates and a pop in public construction.
The string of positive economic news unleashed the bulls on Wall Street as Friday’s reports capped a week of upbeat economic news, including the upward revision of the fourth-quarter growth in gross domestic product to 1.4%.
That was higher than most analysts expected, prompting some to revise their own growth forecast upward and to declare the recession over.
Not all the economic news was rosy, however. The University of Michigan’s consumer sentiment index dropped to 90.7 for the month from 93 in January, due in part to consumers’ fears about the stock market, the veracity of corporate earnings and the safety of their retirement nest eggs in the wake of the Enron scandal.
But what consumers say and what they do are often quite different, said Keitaro Matsuda, senior vice president of economic research at Union Bank of California. He noted that consumers have continued to ring up credit card debt, snap up new cars and purchase new housing despite the economic downturn. Consumer spending is about two-thirds of the economy and strong sales have fueled the growth.
“Consumers say they’re worried about the future, but they keep spending money,” Matsuda said. “Actions speak much louder than words.”
He and other economists pointed to the ISM index as the most significant of the batch of economic reports released Friday. They said the record inventory liquidation seen throughout corporate America in late 2001 has companies scurrying to boost production to rebuild stockpiles.
“There was a great big fire sale in the fourth quarter ... but demand didn’t turn out to be as bad as everyone had feared,” said Nancy Sidhu, senior economist with the Los Angeles Economic Development Corp. “Now orders have gone up fairly dramatically, so companies are beginning to scramble.”
The new orders component of the ISM index rocketed to 62.8, up from 55.3 in January. The big question for the manufacturing sector, analysts said, is whether that momentum can be sustained beyond this temporary restocking windfall. Only when companies resume purchasing computers and other capital goods will the manufacturing recovery be complete, says economist John Mitchell of U.S. Bancorp in Portland, Ore.
“Given all the excess [factory] capacity and continued weak corporate earnings, the upturn in business spending may be slow in coming,” he said.
Likewise, analysts said hiring remains weak in the nation’s factories, and is not likely to increase for some time. Employment is a lagging indicator that most economists expect to keep increasing even as the economy recovers.
That’s because companies aren’t likely to hire new workers until they are sure that the rebound is for real. Instead, they’ll give more hours to workers already on the payroll, many of whom have seen their hours and overtime slashed during the downturn.
The nation’s manufacturing sector went into recession six months before the rest of the economy and has shed more than 1.5 million jobs, more than any other sector. California alone lost nearly 134,000 factory jobs last year.
But despite a continued weak hiring picture and no strong surge in business investment on the horizon, analysts said the worst probably is over for the nation’s manufacturers.
The manufacturing recovery “will still be choppy ... but we’ve moved into an expansion mode,” said David Littmann, chief economist with Comerica Bank in Detroit.
