Weekly Industry Crib Sheet: ISM Manufacturing Index Hits Two-Year High

December 2, 2013

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U.S. manufacturing gained momentum in November, according to data released today by the Institute for Supply Management (ISM).

The ISM's manufacturing Purchasing Managers' Index (PMI) unexpectedly increased to 57.3 in November from 56.4 in October. The reading is the highest since April 2011. Readings above 50 indicate expanding activity.

Most economists expected the latest PMI to slow.

"With 15 of 18 manufacturing industries reporting growth in November relative to October, the positive growth trend characterizing the second half of 2013 is continuing," the ISM report said.

ISM’s subindexes showed strength in most sectors. The new orders index rose to 63.6 from 60.6 in October, the fourth consecutive month above 60. The exports index also continued an upward trend, reaching 59.5 in last month after jumping to 57.0 from 52.0 in September.

The production index increased to 62.8 from 60.8. The ISM inventory index slowed to 50.5 from 52.5, while the prices paid index fell to 52.5 from 55.5.

Labor demand was also strong last month. The ISM employment index rose to 56.5 from 53.2 in October. The expansionary reading suggests the Labor Department will report another increase in manufacturing payrolls within Friday's employment report.

Transportation Orders Drag Down Durable Goods

Orders for transportation equipment and computers decreased significantly last month, contributing to an overall decline in new orders for manufactured durable goods in October, the U.S. Department of Commerce reported on Wednesday.

Durable goods orders slipped 2 percent last month, signaling a reticence for business investment that could curb economic growth for the fourth quarter. The drop in new orders comes on the heels of a 4.1 percent gain in September.

Transportation equipment led the decrease in new orders, tumbling 5.9 percent to $73 billion last month. The decline is largely attributed to a $3 billion decrease in orders for nondefense aircraft and parts -- a 20 percent drop -- though demand for commercial aircraft plunged nearly 16 percent.

New orders for computers and related products fell 7.7 percent last month.

“Business investment is expected to rebound from its weak third-quarter performance, but this latest report points toward a less sturdy rebound than initially expected," Greg Daco, U.S. economist at Oxford Economics, told The Wall Street Journal.

As expected, the auto industry showed continued strength. Orders edged up 1.7 percent, the second strongest gain in three months.

Nonetheless, the reluctance of businesses to invest helps explain why the U.S. economy is growing at a snail’s pace more than four years after the recession. Investment typically accelerates during a recovery, generating more demand for capital good and the labor to produce them.

However, the Commerce Department report seems at odds with a survey released earlier this month that showed an increase in orders. The Institute for Supply Management (ISM) reported that factory activity in November accelerated for the fifth consecutive month. The ISM survey noted a 0.1 percent uptick in new orders.

Housing Starts Perk Up

Permits for new home construction climbed last month to the highest level in more than five years, an indication that the housing market could be stabilizing.

Demand for such multifamily buildings as apartments and condominiums drove a 6.2-percent surge in housing permits for October, the U.S. Department of Commerce reported last week. Permits for multifamily dwellings rose more than 15 percent last month.

Single-family home permits climbed to a rate of 620,000 last month, an increase of 0.8 above the September figure.

“These reports are unequivocally in line with our view that the housing recovery remains well on track, as the lack of supply will continue to support both construction activity and house prices," Harm Bandholz, an economist at UniCredit Research in New York, told the Reuters news service.

Meanwhile, housing prices in 20 major U.S. cities increased a seasonally adjusted 1 percent in September, according to the S&P/Case-Shiller index.

Stability in the housing market could persuade the Federal Reserve Board to start slowing bond purchases, though such a decision risks igniting another run-up in mortgage rates, The Wall Street Journal reported. The Fed is scheduled to meet Dec. 17-18.

The housing market stumbled earlier this year partly because mortgage rates spiked after the Fed indicated it was looking to start reining in the bond-buying program that is designed to keep a lid on long-term rates. The market started to rebound once the Fed left the program untouched.

The temporary government shutdown delayed the collection of data on new housing starts and completions, the Commerce Department said. That data is now scheduled for release on Dec. 18.

Economic Indicators Inch Up

An index used in gauging the nation’s economic health edged higher for the fourth consecutive month, hinting at a possible acceleration of economic growth next year.

The leading economic index (LEI) rose 0.2 percent in October, The Conference Board reported Wednesday. The increase follows large gains of 0.9 percent in September and 0.7 percent in August.

“The recent increase in the index supports our forecast that the U.S. economy is poised to grow somewhat faster at 2.3 in 2014, compared to 1.6 percent in 2013,” Kathy Bostjancic, the board’s director of macroeconomic analysis, said in a press release.

The rise in the LEI is largely attributed to growth in the financial, housing and manufacturing sectors, she said. The LEI is a weighted gauge of 10 indicators designed to signal business-cycle peaks and valleys. Seven of the 10 indicators increased in October.

During the six-month period ending in October, the LEI increased 2.5 percent, faster than the growth of 1.8 percent in the preceding six months.

“Overall, the data reflect strengthening conditions in the underlying economy,” said Ken Goldstein, an economist at the board. “However, headwinds still persist from the labor market, accompanied by business caution and concern about federal budget battles.”

The greatest challenge to the nation’s economic well-being has been relatively weak consumer demand, which continues to be restrained by stagnating wages and slumping confidence, he said.

Sluggish business investment also continued to weigh on growth, according to the LEI report.

Jobless Claims Fall Unexpectedly

Initial claims for unemployment benefits fell 10,000 to a seasonally adjusted 316,000, according to the Labor Department. Economists had expected claims to rise to 330,000.

Claims for the prior week were revised to show 3,000 more applications received than previously reported. The less volatile four-week average fell 7,500 to 331,750. Both the first-time weekly jobless claims and the average have returned to pre-recession levels.

While hiring has picked up pace in recent months, it has yet to reach a pace at which it offsets the week-to-week rate of layoffs. The unemployment rate remains at 7.3 percent -- well above the 5 percent to 6 percent unemployment rate consistent with healthier job markets. When unemployment is lower, workers have more flexibility to change jobs.

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