U.S. Economy: Factory Index Rises to Two-Decade High
Feb. 2 (Bloomberg) -- An index of U.S. manufacturing rose to a two-decade high in January as factories boosted production to replace depleted inventories and meet improving demand.
The Institute for Supply Management's factory index last month increased to 63.6, the highest since 1983, from 63.4 in December. It's the eighth straight month the index has been greater than 50, signaling expansion. Construction spending rose in December for a seventh straight month and consumer purchases increased, separate Commerce Department reports showed.
The pace of growth in the last six months of 2003 was the strongest in almost two decades, causing inventories to drop to record lows. Reduced stockpiles and rising sales suggest that factories will ramp up production. The White House today forecast the economy to grow 4.4 percent this year, the most since 1999.
``We are seeing a rather significant recovery,'' said Peter Hellman, chief financial and administrative officer of Nordson Corp., in an interview from Westlake, Ohio. Manufacturers ``now have new confidence in the tone of the economy.'' Nordson is a maker of machinery that applies adhesives.
Construction spending in December increased 0.4 percent as the decline in mortgage rates last year spurred record home sales, Commerce Department figures showed. Personal spending increased 0.4 percent in December and was 0.2 percent higher, adjusted for inflation.
Incomes increased 0.2 percent, restrained by the biggest decrease in wages and salaries in 17 months. Spending has been supported by tax refunds and cash from mortgage refinancing.
Job Growth
``To keep the solid spending going, we need some job growth, as wage and salary increases are faltering,'' said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.
The economy probably created 165,000 jobs in January, the most in three years, after a rise of 1,000 in December, according to the median forecast in a Bloomberg News survey of economists ahead of Friday's report. The unemployment rate is forecast to hold at 5.7 percent.
``The improvement will lead to job growth,'' said Arun Raha, senior economist of Cleveland-based Eaton Corp., in a televised interview with Bloomberg News. ``In this recovery we've had such tremendous growth in productivity. But we still have seen some job gains, and we will see more.''
President George W. Bush's economic advisers forecast that a strengthening economy will lead to more hiring and corporate investment, after 3.1 percent growth in 2003. Gross domestic product rose 4 percent in the fourth quarter. While less than forecast, growth in the six months that ended Dec. 31 was the fastest since the first half of 1984. Because of tax cuts and the lowest Federal Reserve benchmark interest rate since 1958, ``the economic outlook appears brighter now than at any time in recent years,'' they wrote in his fiscal 2005 budget.
Forecast
Economists had expected a reading of 64 in the factory index, based on the median of 57 forecasts in a Bloomberg News survey. U.S. Treasuries fell in New York, with the benchmark 4 1/4 percent note due in November 2013 falling 1/16, pushing up the yield a basis point to 4.14 percent at 10:38 a.m.
The January reading was the highest since 69.9 in December 1983. The Tempe, Arizona-based, group surveys more than 400 companies in 20 industries, including clothing, printing, transportation, furniture and plastics. Manufacturing accounts for about one-seventh of the economy.
The new orders index, which accounts for about a third of the total, slipped to 71.1 from 73.1 in December.
The production index, a gauge of work being performed, also rose to 71.1, the highest since 80.6 in December 1983, from 69.2.
Inventories
The index of inventories rose to 48.9 from 46.3, indicating that inventories are being run down at a slower pace. The employment index slipped to 52.9 from 53.5.
The backlog of orders index eased to 60.5 from 61. The new export orders index fell to 57.5 from 60. The index of supplier deliveries, which measures how long it takes to get materials, rose to 60.4 from 58.6. The supply managers' prices paid index jumped to 75.5 last month from 66.
``As we go into 2004, we see the economy picking up,'' said William Stavropoulos, chief executive of Dow Chemical Co., in a televised interview with Bloomberg News Thursday. ``We will continue to increase our sales going into 2004.''
Dow, the largest U.S. chemical maker, last week said it posted the most quarterly profit in at least a decade during the fourth quarter as sales rose 20 percent. Dow is raising prices as demand improves for chemicals used in products such as electronics and furniture.
Durable Goods
Maytag Corp., the No. 3 U.S. appliance maker, said last week that fourth-quarter earnings surged more than sevenfold after it lowered costs, and sales jumped the most in almost two years. Sales of major appliances, including Maytag energy-saving refrigerators and cooking ranges, jumped 15 percent in the quarter.
Four consecutive months of factory production increases as of December failed to keep inventories from falling relative to sales last quarter. Makers of long-lasting, big-ticket items, such as computers and automobiles, had enough stock on hand to fill 1.41 months worth of sales at the current pace, an all-time low, according to figures from the Commerce Department last week.
The economy grew at an average of 6.1 percent in the last six months of 2003, the strongest performance since the first half of 1984. It's projected to grow at a 4.3 percent annual pace this quarter and expand 4.4 percent for the year, according to the median estimates in a Bloomberg News survey of economists earlier this month.
Rising Exports
Manufacturing may also be getting a boost from rising exports. Growth last quarter was augmented by a 19.1 percent jump in exports at an annual basis, the biggest increase in seven years, the Commerce Department reported Friday.
The value of the dollar has dropped 9.8 percent against a trade-weighted basket of currencies from a broad group of the country's trading partners since reaching a high in February 2002. A cheaper dollar makes American-made goods cheaper for foreigners.
The drop in the dollar against the euro ``has significantly improved our competitiveness,'' said James Owens, vice chairman and future executive officer of Caterpillar Inc., the world's largest maker of earth-moving equipment, in a televised interview with Bloomberg last week.
In Europe last month, an index of manufacturing rose to the highest in three years, reflecting increased export demand from the U.S. and Asia. An index based on a survey of 2,000 purchasing managers compiled for Reuters Group Plc by NTC Research Ltd. rose to 52.5 from December's 52.4, figures from the news agency available on the Internet showed today. A reading of more than 50 shows expansion.
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