NEW YORK Manufacturing grew at its fastest pace in six months in December, capping a late-year upswing, but a European slump and rising oil prices posed threats to the U.S. economy in the new year.
The Institute for Supply Management's index of national factory activity hit its highest level since June, coming in above forecasts at 53.9, more evidence that the U.S. economy picked up steam in the fourth quarter.
A reading above 50 indicates expansion.
A rise in new orders for manufactured goods suggested momentum going into 2012, Tuesday's report showed.
"It's a pretty decent report overall," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York. "We're not roaring ahead here, but it's also not collapsing. That's consistent with our overall view of the economy in 2012."
The data contrasted with the state of manufacturing in much of the rest of the world. The euro zone's industrial sector ended 2011 with a whimper, posting its fifth consecutive month of contraction. Asian factories also closed out the year on a weak note.
In Britain, December capped the worst quarter for manufacturing in more than two years.
Economists expect growth in the U.S. economy accelerated between October and December, improving on the 1.8 percent rate recorded over the prior three months. Macroeconomic Advisers forecast a 3.5 percent rate of growth in the fourth quarter.
Another report on Tuesday showed U.S. construction spending neared an 18-month high in November.
U.S. stocks rose after the U.S. data, with the Dow and S&P 500 indexes up about 1.7 percent each.
For a graphic on PMI numbers: r.reuters.com/guq45s
U.S. construction spending: link.reuters.com/xec85s
HURDLES AHEAD IN 2012
The fourth quarter's quicker growth is not likely to persist through 2012 as high oil prices, a still-moribund U.S. housing market and high unemployment all threaten to the recovery.
Crude oil rose above $110 a barrel on Tuesday as tension between Iran and the United States stirred fear of a possible disruption to oil supplies from the Middle East.
In a note to clients last week, Goldman Sachs said it expects "growth in 2012 to look broadly similar to 2011," bumping along at a below-trend pace.
The Federal Reserve has held interest rates at zero since 2008 to encourage lending and last year pledged to keep them there until at least mid-2013.
Minutes from the last Fed policy meeting released on Tuesday said the central bank intends to publish forecasts for its benchmark interest rate and when officials expect the first rise to occur. That change could show super-low rates will be maintained for longer than previously expected.
Like high oil prices, Europe's debt crisis may also mean trouble for U.S. growth. Economists fear that deep spending cuts and tax hikes across Europe to deal with large deficits almost guarantee a euro zone recession.
"It's the global economy. Negative economic events overseas eventually trickle back to the U.S.," said John Doyle, currency strategist at Tempus Consulting in Washington.
Goldman Sachs economists estimated Europe's crisis could shave a full percentage point from U.S. growth.
A slump in Europe would be particularly bad news for U.S. manufacturers.
"We are very nervous about the impact on U.S. exporters of the recession in Europe, which is likely to prove deep and long," said analysts at High Frequency Economics. "Exports of goods are very important to manufacturing export-focused firms."
Nonetheless, Tuesday's factory data showed several signs of resilience in the U.S. economy. Hiring in the sector grew, a good sign for an economy still struggling under the weight of an 8.6 percent jobless rate.
Data due on Friday is expected to show the U.S. economy added 165,000 jobs in December, but also a slight rise in the jobless rate to 8.7 percent.
"Overall, 2011 is finishing on an upswing, with a lot of indicators pointing positive," said Bradley J. Holcomb, chairman of the ISM Manufacturing Business Survey. He noted that customer inventories fell, suggesting increased demand.
High Frequency Economics strategists noted, however, that the ISM report "has very little to say about the state of small businesses," noting that small firms account for about half of gross domestic product growth.
Small business borrowing improved in November, nearing a four-year high, according to the most recent Thomson Reuters/PayNet Small Business Lending Index, which was published on Monday.