December 3, 2007 / 6:30 PM / 12 years ago

WRAPUP 1-GLOBAL ECONOMY-U.S. factories cool; Europe picks up

(Recasts with U.S. ISM data, global PMI)

By Ross Finley and Emily Kaiser

LONDON/WASHINGTON, Dec 3 (Reuters) - U.S. factory activity grew modestly in November as export demand helped to compensate for a housing-fed domestic slowdown, while European and UK manufacturing stepped up a notch.

The Institute for Supply Management said its monthly index of U.S. factory activity edged down for a fifth straight month, to 50.8 from 50.9 in October. That was still better than the 50.5 reading economists polled by Reuters had expected. A reading of 50 or above denotes growth.

“New export orders have soared while import orders have plunged to recession-like levels,” said Haseeb Ahmed, U.S. economist with JP Morgan in New York. That means “trade should continue to contribute strongly to GDP.”

The November reading on exports jumped to 58.5 from 57.0 a month earlier, while imports remained at a weak 47.5 for a second consecutive month.

A slumping dollar has boosted demand for U.S. exports, helping to insulate the economy from the triple threat of weak housing, tighter credit terms and soaring energy prices.

However, the ISM report was not entirely rosy. The gauge of employment tumbled to 47.8 from 52.0, which suggests that Friday’s monthly U.S. jobs report may contain some bad news. A weakening labor market would weigh heavily in the Federal Reserve’s thinking as its Open Market Committee meets next week to set interest rates.

Some economists said it was only a matter of time before the U.S. manufacturing sector weakened.

“The ISM index shows manufacturing keeping its head above water — just — thanks to very strong export orders,” said Nigel Gault, U.S. economist with Global Insight, in Lexington, Massachusetts. “But order backlogs are declining and we do not believe that export growth alone can prevent an overall decline in manufacturing output in the current quarter.”

EUROPE FLEXES MANUFACTURING MUSCLE

Worldwide, the JP Morgan Global Manufacturing PMI index rose to 52.2 in November from 51.9 in October, with the euro zone and UK leading the way.

In Europe, the RBS/NTC November Purchasing Manager’s Index was revised up to 52.8 from a 52.6 flash estimate, well above the 50.0 cut-off mark between growth and contraction. The UK PMI confounded expectations for a fall and jumped to 54.4 from 52.9.

Unemployment in the euro zone unexpectedly fell to 7.2 percent in October, the lowest since the currency bloc was formed, according to Eurostat.

“The resilience in the PMI, together with upside inflation pressure, supports the view that the ECB will keep rates on hold at this Thursday’s meeting,” said Stuart Bennett at Calyon. [ECB/INT]

Similarly, economists said the bounce in UK manufacturing, along with a pick-up in prices companies charge, reduced chances that the Bank of England will cut rates on Thursday — a decision set to be one of the most hotly debated in years.

“These data provide some support for the BoE hanging fire at this week’s meeting,” said Richard McGuire at RBC Capital Markets, “not least owing to the fact that they will further serve to accentuate the bank’s already acute concerns over corporate pricing power.” [BOE/INT]

Euro zone officials on Monday highlighted the growth risk over inflation in a series of public comments, although the central bank’s mantra has been to focus on price risks and the current “hump” in inflation. [ID:nL03679354]

In Japan, the Reuters tankan figures, while upbeat on manufacturing, showed the weakest level of optimism among Japanese services companies in 3-1/2 years.

That came alongside figures showing a 1.2 percent fall in Japanese business capital expenditure in the third quarter, which was better than the 2.0 percent fall expected and a big improvement over the 4.9 percent decline in the prior period.

That could point to a small upward revision to Japan GDP figures due on Friday.

Unlike Japan, the European and U.S. figures showed that inflation remains a worry.

While manufacturing activity picked up in Europe and the UK, so did prices charged at the factory gate — particularly in Britain, where the rate of increase was just a sliver below a record high logged a few months ago.

The U.S. ISM data painted a similar picture, with the prices measure jumping to 67.5 from 63.0 a month earlier.

That was a stark reminder that price pressures are not likely to dissipate any time soon, given that crude oil prices are still not far off $100 a barrel and companies have become more aggressive in passing on higher energy costs. (Reporting by Jonathan Cable, Christina Fincher in London and Shigeo Kodama in Tokyo; Editing by Dan Grebler)

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