U.S. Economy: Factory Expansion Is Fastest Since 2006

Jan. 4 (Bloomberg) -- U.S. manufacturing expanded in December at the fastest pace in more than three years, capping a late-2009 global factory rebound that helped pull the world out of the worst slump since the 1930s.

The Institute for Supply Management’s factory index rose to 55.9, the highest level since April 2006, according to the Tempe, Arizona-based group. Readings greater than 50 signal expansion. Construction spending dropped for a seventh month, the Commerce Department said in a separate release. Stocks rallied worldwide as reports showed the improvement at U.S. factories is being accompanied by strength in European and Chinese manufacturing. A stimulus-driven rebound in global demand is boosting orders that will encourage producers to ramp up output and fuel a self-sustaining recovery.

“There is a broad-based global manufacturing recovery occurring right now,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. Maki was the No. 1 forecaster of economic growth from January through September in a Bloomberg News survey. “Manufacturing was picking up speed as we moved into the end of 2009, and we expect growth will be picking up further.”

In Europe, manufacturing grew in December at the fastest clip in 21 months. An index based on a survey of purchasing managers in the 16-nation euro area rose to 51.6 from November’s 51.2, London-based Markit Economics said. Readings higher than 50 indicate growth.

Chinese factories in December had their fastest growth in five years. A purchasing managers’ index rose to 56.1, HSBC Holdings Plc and Markit Economics said in an e-mailed statement. The measure of factories in the world’s third-largest economy is based on a survey of more than 400 manufacturers.

Stocks Rally

The Standard & Poor’s 500 Index added 1.6 percent to 1,132.99 at 4:07 p.m. in New York, the highest close since Oct. 1, 2008. The S&P Supercomposite index of industrial machinery companies rose 1.5 percent to 341.9.

The ISM figure compared with economists’ median forecast for an increase to 54.3, according to 65 projections in a Bloomberg News survey. Estimates ranged from 52 to 56. Manufacturing accounts for about 12 percent of the U.S. economy.

The ISM index is up 23 points from a 28-year low of 32.9 reached in December 2008, after the collapse of Lehman Brothers Holdings Inc. caused credit markets to freeze. The advance is the biggest annual gain since 1983.

The production index climbed, while the new orders gauge rose to the highest level in five years. The employment index increased to 52 from 50.8, the third straight month of expansion.

Higher Prices

Government-assisted rebounds in housing and auto-making, two of the most depressed areas during the recession, contributed to the initial burst of activity in recent months. Economic growth may be helped in coming months by companies rebuilding inventories.

Employers probably cut fewer jobs in December and may begin to hire after almost two years of job losses. Economists surveyed by Bloomberg forecast payrolls last month fell by 4,000 after a loss of 11,000 in November. The Labor Department’s report is due Jan. 8.

The U.S. economy, the world’s largest, expanded at a 2.2 percent pace from July through September after a yearlong contraction that was the worst since the 1930s, figures from the Commerce Department showed last month. Economists surveyed by Bloomberg last month forecast growth to pick up to a 3 percent pace in the fourth quarter and average 2.6 percent for all of 2010, according to the median estimate.

Construction Spending

The economic recovery may get little relief from construction. Spending on construction projects dropped 0.6 percent in November, to the lowest level in more than six years, the Commerce Department said today in Washington.

The November decrease was the seventh straight and was marked by declines in homebuilding and commercial projects.

“Lingering credit constraints are a key reason why I expect the strengthening in economic activity to be gradual,” Federal Reserve Vice Chairman Donald Kohn said yesterday in a speech to the American Economic Association in Atlanta.

Fed Chairman Ben S. Bernanke and his fellow policy makers have left the benchmark lending rate in a range of zero to 0.25 percent for a year. Central bankers said Dec. 16 that high unemployment and “subdued” inflation warrant low interest rates “for an extended period.”

As the global economy rebounded, exports rose for the sixth consecutive month in October. A 13 percent drop in the dollar since March 5 against a basket of six major currencies also makes American goods more competitive overseas.

Hiring Again

Caterpillar Inc., the world’s largest maker of bulldozers and excavators, will bring back some laid-off workers next year as sales improve, said Chief Executive Officer Jim Owens.

“We’ll gradually begin to call people back and to rebuild our overall sales and ability to ship product,” Owens said in an interview Dec. 11 with Bloomberg Television.

Caterpillar cut about 18,700 full-time jobs and about the same number of temporary workers since December 2008 as the global recession reduced demand. The Peoria, Illinois-based company predicts 2010 sales will increase as much as 25 percent from the midpoint of the 2009 forecast range