U.S. Factory Sector Posts Strong Expansion


Wall Street Journal

Consumer Spending Increases a Bit

By MICHAEL S. DERBY and JUDITH BURNS

U.S. factory sector activity booked its best performance in more than five years in January, amid a rebound in hiring and rising price pressures.

In a key report, private research group the Institute for Supply Management said Monday its index of manufacturing activity moved to 58.4 in January, the best reading since August 2004, from 54.9 in December and 53.7 in November. Readings over 50 indicate growth and describe the breadth, but not magnitude, of the change. Economists had expected the index to come in at 55.3.

Separately, consumer spending was tepid in December despite rising income levels, the Commerce Department reported Monday, suggesting consumers remained cautious at year end. Meanwhile, construction spending tumbled.

“This month’s report provides significant assurance that the manufacturing sector is in recovery,” said Norbert Ore, who directs the ISM survey. He added, “13 of 18 industries reported growth, up from nine industries last month, and this is a good indication that the impact of the recovery is expanding.”

Most of the report’s details were positive, and supportive of the idea the manufacturing sector is continuing to recover and provide a foundation for a broader economic rebound. In the report, the group said its new orders index hit 65.9, from December’s 64.8, while the production index was 66.2, from 59.7.

Employment continued its wobbly move toward job gains, with that index at 53.3, versus 50.2 the prior month. January was the second straight month of growth and the best performance for that reading since April 2006.

Inventories shrank less slowly, with that index standing at 46.5, from 43.0. Falling inventory levels have been a major driver in spurring new production as demand from consumers and businesses mends.

Meanwhile, inflationary pressures faced by factory operators grew, with the prices index at 70.0, from 61.5.

Income, Spending Rise

Personal income rose by 0.4% in December, while personal spending rose by 0.2%, the Commerce Department said Monday. The rise in incomes was more than expected while spending advanced by less than economists had anticipated.

A key price gauge closely watched by the U.S. Federal Reserve showed prices rose 1.5% in December compared to December 2008. The core price index for personal consumption expenditures, which excludes volatile food and energy, was up 0.1% in December compared to the prior month.

Fed policy makers watch the core PCE index closely for signs of inflation pressures.

The PCE price index including food and energy prices was up 0.1% in December compared to November and climbed 2.1% year over year.

Economists surveyed by Dow Jones Newswires had forecast consumer spending and consumer income each would rise by 0.3% in December. The monthly core PCE was seen rising by 0.1%.

Prior month data were revised upward. The Commerce Department reported that personal income rose 0.5% in November, compared to a previously reported 0.4% gain. It said personal spending advanced 0.7% compared to the 0.5% increase that was reported earlier.

Construction Spending Tumbles

U.S. construction spending fell in December much more than expected, reflecting commercial real estate weakness and uncertainty over a government subsidy.

Spending declined 1.2%, at a seasonally adjusted annual rate of $902.55 billion compared to the prior month, the Commerce Department said Monday.

It was the fifth decrease in six months. November outlays were revised way down and October was adjusted way up. Spending fell 1.2% in November; it was originally estimated down 0.6%. October spending rose 1.5%; it was previously estimated falling 0.5%.

For all of 2009, spending fell 12.4% from 2008. That was the largest drop since records began in 1964.

Economists surveyed by Dow Jones Newswires estimated spending in December on construction would tumble 0.7%.

Residential construction project spending dropped 2.7% to $268.7 billion, after dropping 1.4% in November. Home sales and housing starts suffered at the end of the year because of uncertainty whether a tax credit for first-time home buyers would be renewed.

Commercial construction also slid in December. Outlays on non-residential projects decreased 0.5%. Spending dropped for hotels, roads, and factories.

In all of 2009, commercial construction was down 11.2% from 2008.

Unemployment is hurting commercial construction; it creates vacant space and lowers occupancy rates. Rents have fallen, which make space cheaper but also discourages development.

Difficulty getting loans hamstrings business plans for expansion or development. A leading indicator of construction activity, the Architecture Billings Index, points to future sluggishness.

The ABI takes into account lag time between architecture billings and construction spending. The gauge reflects whether companies are reporting higher or lower billings.

Any number above 50 indicates an increase in billings. The latest ABI was 43.4 in December.

“The main impediment to an economic turnaround for the design and construction industry remains frozen credit markets,” said Kermit Baker, chief economist for the American Institute of Architects. “We continue to hear that there are numerous viable projects out there awaiting financing.”

Monday’s report said U.S. construction spending in the private sector during December decreased by 1.2% to $592.96 billion. Spending fell 1.1% in November.

Public-sector construction spending last month fell 1.2% to $309.59 billion. It was the fifth straight decrease, despite the stimulus enacted by Washington a year ago to spur the economy. Federal spending in December rose but state and local dropped.

—Jeff Bater contributed to this article.

Write to Judith Burns at judith.burns@dowjones.com

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