US manufacturing sector continues to roar

US manufacturing sector continues to roar
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: February 1 2010 14:18 | Last updated: February 1 2010 15:40
http://www.ft.com/cms/s/0/6491c3b4-0f33-11df-8a19-00144feabdc0.html


The US manufacturing sector continued to churn last month, with new figures showing that activity rose to the highest level in more than five years thanks to a surge in new orders and production.

Separately, US consumers saved a larger portion of their incomes in December, as the shaky labour market continued to pinch spending.

The Institute for Supply Management survey for January climbed to 58.4 from 54.9 in December. It was the strongest level of activity since August 2004 and the six month running of expansion in the sector. Wall Street analysts predicted a smaller increase.

“This month’s report provides significant assurance that the manufacturing sector is in recovery,” said Norbert Ore, chairman of the ISM’s survey committee.

In January, new orders, production, employment and prices all increased at accelerating rates. Those who responded to the survey said that they are experiencing higher commodity prices and overall activity was stronger than it usually is during this time of year.

Activity picked up in 13 of the 18 industries that ISM tracks. Textile mills, apparel and leather producers and makers plastic and rubber products saw the biggest jump in activity in January.

Although US factories are ramping up their output, the construction sector remains under pressure. Commerce department figures showed that construction spending fell by a larger than expected 1.2 per cent in December and is down by 9.9 per cent on the year.

The monthly decline was driven down by a 2.7 per cent drop in residential spending. By comparison, spending on non-residential construction slipped by 0.5 per cent.

Meanwhile, personal consumption expenditures increased by 0.2 per cent, commerce department figures showed on Monday. It was the third consecutive monthly rise, but it slightly trailed economists’ expectations.

Incomes, meanwhile, rose by a larger-than-anticipated 0.4 per cent in December, as workers benefited from year-end bonuses and business began to unfreeze wages. Larger government transfers also boosted incomes.

With incomes outpacing spending, the savings rate rose to 4.8 per cent, from 4.5 per cent in November.

“The road block to stronger spending growth is the employment situation,” said John Ryding and Conrad DeQuadros, economists at RDQ Economics, noting that labour compensation fell by 0.6 per cent in the fourth quarter.

Consumer spending accounts for about 70 per cent of economic activity in the US. Last week, official figures showed that spending picked up by 2 per cent in the fourth quarter, as the US economy grew by 5.7 per cent.

Joshua Shapiro, chief US economist at MFR, predicts that the savings rate, which is the proportion of income left after consumption and taxes, will tend to rise in the coming months and that consumers are altering their behaviour in the aftermath of the recession.

In its latest meeting minutes the Federal Reserve said household spending had been expanding at a moderate rate, but that weakness in the labour market, slow income growth, diminished home values and tight credit had been constraining demand.

A bright note on Monday was that inflation does not appear to be a threat, with the closely watched core personal consumption expenditures index rising by just 0.1 per cent in December and up 1.5 per cent year on year.