U.S. manufacturing, construction data suggest growth pickup

NEW YORK Tue Sep 3, 2013 12:08pm EDT

Workers assemble built-in appliances at the Whirlpool manufacturing plant in Cleveland, Tennessee August 21, 2013. REUTERS/Chris Berry

Workers assemble built-in appliances at the Whirlpool manufacturing plant in Cleveland, Tennessee August 21, 2013.

Credit: Reuters/Chris Berry

NEW YORK (Reuters) - Stronger-than-expected data on U.S. manufacturing and construction spending on Tuesday hinted the world's biggest economy was gaining traction, potentially supporting views the Federal Reserve will soon slow its massive bond-buying program.

The U.S. manufacturing sector grew last month at its fastest pace in more than two years, with the Institute for Supply Management's (ISM) index of national factory activity rising to 55.7 in August from 55.4 the prior month.

That comfortably beat expectations for 54, with the index at its highest since June 2011.

A reading above 50 indicates expansion in the sector.

"This was an unambiguously positive report, signaling a further acceleration in manufacturing momentum in August," said Millan Mulraine, director of U.S. research and strategy at TD Securities in New York.

New orders also marked their best level in more than two years, with that sub-index jumping to 63.2 from 58.3.

The reading for new orders minus inventories, a way to extrapolate so-called final demand, marked its highest in more than three years, as well. That measure of demand has now risen for three straight months, potentially adding more evidence to support a Fed pullback in bond buying.

Employment, however, slipped to 53.3 from 54.4.

Jobs data are especially important to the Fed, which wants to see the unemployment rate closer to 6.5 percent. It is currently 7.4 percent.

The manufacturing data helped accelerate a slide in Treasuries prices on Tuesday, with U.S. 10-year notes down one point and 30-year bonds down two points.

U.S. construction spending rose in July, too, climbing 0.6 percent to an annual rate of $901 billion, the Commerce Department said. The growth rate was above the median forecast in a Reuters poll of analysts.

In addition, demand picked up in the U.S. manufacturing sector in August, a separate report showed.

Financial data firm Markit said that while its final U.S. Manufacturing Purchasing Managers Index eased to 53.1 from July's reading of 53.7, a pickup in new orders and a drop in inventories pointed to faster growth ahead.

"Inventories of finished goods showed the largest fall since 2009 as some companies reported that demand often exceeded production," said Markit chief economist Chris Williamson. "Factories will need to ramp up production to replace depleted inventories given this order book growth."

Faster global growth could help persuade policymakers at the U.S. Federal Reserve to slow their massive bond purchase program soon.

The bank is now buying $85 billion per month in Treasuries and mortgage-backed securities, but policymakers have hinted at exiting from the strategy as the U.S. economy grows strong enough to stand on its own.

A more vigorous U.S. economy could nudge the Fed closer to a pullback as soon as its next meeting on September 17-18.

But with U.S. data still often painting a mixed picture, that potential September exit could yet change.

Investors are awaiting the August nonfarm payrolls report, due on Friday, for more clarity on the health of the U.S. jobs market.

Other data on Tuesday and earlier in the week also pointed to more robust global growth.

In China, domestic demand helped the services sector grow steadily in August, suggesting government measures have started to steer Asia's biggest economy out of its longest slowdown.

European factory data also pointed to growth in August, including faster-than-expected manufacturing growth in Britain.

The survey was especially welcome after a long economic stagnation in the U.K., which earlier this year flirted with a triple-dip recession.

(Reporting by Luciana Lopez; Editing by Chizu Nomiyama and Andrea Ricci)

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Comments (5)
keebo wrote:
“The survey was especially welcome after a long economic stagnation in the U.K., which earlier this year flirted with a triple-dip recession.”

I wonder when these recessions stop being double, triple, etc., etc., and just become plain old recessions.

Sep 03, 2013 12:12pm EDT  --  Report as abuse
I am afraid it will never be same, keebo.
The system has changed. I call the New Economy. All these years the investments into productivity were huge. The profits were huge. The dividends were very generous.
Now we have a situation of the lean economy, which provides high profitability in the low consumption environment.
And – yes! For 1-10% of the Golden Billion, the coming 5th anniversary of the Great Recession will be celebrated by parties. I guess.
I was not invited. So sad to be outside.

Sep 03, 2013 12:38pm EDT  --  Report as abuse
dareconomics wrote:
The mainstream media continues to cheerlead the American economy, which makes it difficult for them to report accurately on the subject. This is the first line from the Bloomberg article:

Manufacturing in the U.S. expanded more than forecast in August to the fastest pace since June 2011, a sign the sector will contribute more to the expansion in the second half of the year.

The first part clause from the quote is accurate, though it does not place the number into the proper context. It is true that the PMI has not been higher since June, 2011, but we should not confuse this month’s spike in the number with a trend. The number has been at 55 twice before since 2011 as indicated by the red circles in the chart above. You can look to the right of the circles to see what happened next.

Furthermore, a PMI around 55 indicates a moderate expansion, but our economy requires stronger growth to stir the labor market from its torpor. A number around 60, as indicated by the red ellipse, for a sustained period of time would indicate excellent growth for manufacturing and would probably spur firms to hire more workers.

The second part of the clause is pure cheerleading. First, the article assumes that there will be an expansion in the second half of the year. Second, it gives too much credit for what a strong manufacturing sector may do for economic growth. Manufacturing accounts for only about one-eighth of US GDP. This means that a whopping 8% rise in output will grow the economy by only 1%. However, the same 8% rise in consumer spending accounting for 70% of the economy would lead to a 5.6% rise in GDP.

The only sign one needs to examine to ascertain the true state of the American economy is consumer income. If they have it, they will spend. If not, well, then it is more of the same: a corporate/upper class recovery simultaneous with a labor market recession for virtually everyone who works for a living.

Full post with charts, images and links:

http://dareconomics.wordpress.com/2013/09/03/around-the-globe-09-03-2013/ ‎

Sep 03, 2013 1:37pm EDT  --  Report as abuse
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