January 2, 2014 4:08 pm

US manufacturing shows brisk growth

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US manufacturing expanded at a brisk pace in December while November construction spending rose to its highest level in nearly five years, adding to a stream of data reflecting positive momentum in the world’s largest economy.

The Institute for Supply Management said on Thursday its index of national factory activity stood at 57 last month, in line with economists’ expectations, although slightly below November’s two-and-a-half-year high of 57.3. A reading above 50 indicates expansion.

The forward-looking new orders index soared to a level last seen in early 2010 – at 64.2 from 63.6 in November – suggesting the sector, which accounts for around 12 per cent of economic activity, will continue to show strength in the new year.

The closely watched employment index meanwhile rose to 56.9, its best performance since June 2011, from 56.5 in November. Manufacturing is very sensitive to the health of the global economy, and export orders remained relatively healthy at 55.

“The spurt in US manufacturing that ended 2013 will probably cool down in early 2014 without further help from China and Europe, but the manufacturing sector ended 2013 far better than it ended 2012,” said Michael Montgomery, US economist at IHS Global Insight.

Americans are buying more cars and houses, fuelling factory output. At the same time companies are boosting purchases of large machinery and other equipment. The upbeat trends have spurred manufacturers to step up hiring and create jobs at higher pay grades, and raised hopes that a small American manufacturing renaissance that developed in recent years can be sustained.

The upbeat industrial data comes on the heels of an encouraging reading on US gross domestic product growth in the third quarter, which rose to an annual rate of 4.1 per cent, the best in nearly two years. The labour department’s employment report for December is due next week.

Strength in both the manufacturing and services sector, against a backdrop of an improving labour market picture, contributed to the Federal Reserve’s decision in December to begin slowing its $85bn a month in bond purchases. The encouraging economic data since then, including Thursday’s manufacturing ISM, could encourage the Fed to keep tapering when officials meet this month.

“It is very likely they tweak the taper yet again as long as December payroll data reflects the growth the ISM data are indicating,” said Steve Blitz, chief economist at ITG Investment Research.

Another data release showed construction spending rose to its highest level since March 2009 in November as a surge in private projects offset a drop in public outlays. Construction spending increased 1 per cent to an annual rate of $934bn, the commerce department said, marking the eighth straight monthly rise. The figures were in line with expectations, offering new comfort about the housing sector after a strong reading on home prices in this week’s latest Case-Shiller index.

Private residential spending hit its highest level since June 2008 as building of single family homes and multifamily apartment blocks surged. Outlays on non-residential structures, which include factories and gas pipelines, touched an 11-month high.

Still, residential construction remains well below normal levels and there are concerns that rising mortgage rates could turn homebuyers away. Public construction spending fell 1.8 per cent as spending by federal, state and local governments declined.

Meanwhile, initial claims of unemployment benefits last week stood at 339,000, slightly below expectations and the previous level. This is roughly consistent with a slow but steady recovery in the US labour market, although economists warned that recent weeks’ data have been clouded by holiday hiring and firing distortions.

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