Manufacturing Sector Expands in January

February 3, 2010

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The U.S. manufacturing industry expanded for the sixth consecutive month in January, posting major gains and strengthening the sector's role within the economic recovery, new reports show.

Many segments of the United States economy continue to stabilize and recover from the downturn, yet unemployment remains high, consumer demand is sluggish and too-low inventory levels may be slowing long-term growth. Despite these mixed signs, the manufacturing sector continued to expand through January, growing at a faster rate than in previous months.

According to the Institute for Supply Management's latest manufacturing ISM Report on Business, released this week, manufacturing grew for the sixth straight month in January, in line with trends in the overall U.S. economy, which expanded for the ninth consecutive month.

The ISM's monthly purchasing managers' index (PMI), a key indicator for the factory sector, rose to 58.4 percent, up from 54.9 percent in December and the highest reading since August 2004, when the PMI hit 58.5 percent. PMI readings above 50 percent indicate growth in the sector.

The rate of expansion also accelerated in January, as the PMI gained 3.5 percentage points over the previous month compared to the 1.2-point gain from November to December. January's PMI was also well above the 12-month average of 48 percent.

"This month's report provides significant assurance that the manufacturing sector is in recovery. Both the New Orders and Production Indexes are above 60 percent, indicating strong current and future performance for manufacturing," Norbert J. Ore, chair of ISM's Manufacturing Business Survey Committee, said in the report. "This month, 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."

However, some analysts expect the January gain will only be a temporary boost for the industry. As the Washington Post reports, manufacturers scaled back production in early 2009 in response to weak consumer demand, but because the demand drop was not as severe as expected, they are now struggling to replenish depleted inventories.

"Firms were previously in a panic mode and drastically slashed their inventories by reducing production, but now they find themselves low on materials and components," Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, explains in an analysis of the ISM findings.

Reports warn that once stockpiles are rebuilt, demand may taper off.

"Even amid the upbeat reports, many manufacturers remain cautious about the outlook," the Wall Street Journal explains. "They worry that consumers, fearful of job losses and facing turmoil in the housing market, will be hesitant to spend more money in the months ahead."

Despite these concerns, positive signs in manufacturing are increasingly strengthening the overall economy, as "[t]he recovery in manufacturing has led the economic rebound that began in the 2009 third quarter after a full year of contraction in gross domestic product," according to Agence France-Presse.

Encouraging signs can also be seen in the current growth of the durable goods market. According to data from the U.S. Department of Commerce last week, the value of new orders for manufactured durable goods rose by $500 million in December, a 0.3 percent increase following two consecutive months of decline. Machinery represented the largest increase, rising 6 percent to reach $24.1 billion.

Durable goods shipments, up for the last four months, increased 2.9 percent in December, while durable goods inventories dropped 0.2 percent, the 13th consecutive month of decline, the Commerce Department found.

"The U.S. manufacturing sector is showing clear and consistent signs of growth and expansion," Michael Woolfolk, foreign exchange strategist at the Bank of New York Mellon, told Reuters. "That said, the elephant in the room remains employment, or more precisely, unemployment."

Earlier

U.S. Manufacturing Expands in November

Industrial Output Makes Largest Quarterly Gain in Four Years

U.S. Manufacturing Ends 2009 with Continued Growth

Resources

January 2010 Manufacturing ISM Report on Business Institute for Supply Management, Feb. 1, 2010

MAPI Analysis on ISM Report: 'Very Positive' Start to 2010 by Daniel J. Meckstroth Manufacturers Alliance/MAPI, Feb. 1, 2010

Government Data Show an Ongoing but Uneven Economic Recovery by Ylan Q. Mui The Washington Post, Feb. 2, 2010

Data Hit Hopeful Notes for Economy by Sara Murray The Wall Street Journal, Feb. 2, 2010

U.S. Manufacturing Heats Up to 2004 High by Veronica Smith Agence France-Presse, Feb. 2, 2010

...Durable Goods Manufacturers' Shipments, Inventories and Orders December 2009 U.S. Department of Commerce, Jan. 28, 2010

Manufacturing Expands but Shows Few Job Gains by Steven C. Johnson Reuters, Feb. 1, 2010

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