US factory growth shows economy more resilient

Published 1:58 pm Wednesday, May 2, 2012

U.S. manufacturing grew last month at the fastest pace in 10 months, suggesting that the economy is healthier than recent data had indicated.

New orders, production and a measure of hiring all rose. The April survey from the Institute for Supply Management was a hopeful sign ahead of Friday’s monthly jobs report and helped the Dow Jones industrial average end the day at its highest level in more than four years.

The trade group of purchasing managers said Tuesday that its index of manufacturing activity reached 54.8 in April, the highest level since June. Readings above 50 indicate expansion.

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The sharp increase surprised analysts, who had predicted a decline after several regional reports showed manufacturing growth weakened last month. The gain led investors to shift money out of bonds and into stocks. The Dow Jones industrial added 66 points to 13,279, its best close since Dec. 28, 2007. Broader indexes also surged.

The ISM manufacturing index is closely watched in part because it’s the first major economic report for each month. April’s big gain followed a series of weaker reports in recent weeks that showed hiring slowed, applications for unemployment benefits rose and factory output dropped.

“This survey will ease concerns that the softer tone of the incoming news in recent months marked the start of a renewed slowdown in growth,” Paul Dales, an economist at Capital Economics, said in a note to clients. “We think the latest recovery is made of sterner stuff, although we doubt it will set the world alight.”

The latest reading is well above the recession low of 33.1 and above the long-run average of 52.8. But it’s still below the pre-recession high of 61.4.

Dan Meckstroth, chief economist at the Manufacturers’ Alliance, notes that in the past 20 years, the index has been at or above 54.8 only one-third of the time.

A measure of employment in the ISM’s survey rose to a 10-month high. That indicates that factories are hiring at a solid pace.

A gauge of new orders jumped to its highest level in a year. That could signal faster production in the coming months. Export orders also rose, offsetting worries that weaker economies in Europe and China could drag on U.S. exports.

A separate report showed China’s factory sector is still growing. A survey of purchasing managers in China found that the manufacturing sector expanded for the fifth straight month in April.

Rich Bergmann, managing director of Accenture’s global manufacturing practice, said large manufacturers are driving U.S. growth. They are pushing their suppliers to boost output, which has led many to hire more workers.

Large companies are also helping smaller companies in their supply chain, Bergmann said, by guaranteeing a certain level of orders or helping smaller companies obtain financing to expand.

“There’s just a tremendous trickle-down effect in these industries,” Bergmann said. “That’s a very positive trend that we think will continue.”

Boeing reported a 58 percent jump in profit in the January-March quarter. Orders for its more-fuel-efficient 737 jetliner soared. The company added 11,000 employees last year.

The global airplane manufacturer’s growth has benefited companies like Charlotte, N.C.-based Goodrich Corp., which makes aircraft components. Its sales to large aircraft makers jumped 27 percent in the first quarter.

Caterpillar, the world’s largest manufacturer of construction and mining equipment, last week reported that its profit grew 29 percent in the January-March quarter. The company said it is boosting its manufacturing capacity to handle a record backlog of orders.

Small companies are also reporting big gains. Boston-based, which prints custom T-shirts, other clothing and accessories, plans to start production at a new plant in Las Vegas in July. The company’s revenue doubled in the first three months of this year.

The company is about to sign a five-year lease for the Las Vegas factory and has purchased about $1 million in new printing equipment. The company plans to hire nearly 100 people by the end of this year, on top of its current work force of 150.

“I’m pretty confident that we can sustain this growth,” said Mark Venezia, vice president for global sales and marketing. “We’re opening up a new facility banking on that.”

Factories account for only about 9 percent of total payrolls but added 13 percent of the new jobs last year. Manufacturers have added 120,000 jobs in the past three months, about one-fifth of all net gains.

Economists predict manufacturers added 20,000 jobs in April, according to a survey by FactSet.

Still, manufacturing represents only about 12 percent of economic activity. Other areas continue to struggle.

A separate report showed U.S. builders barely increased their spending on construction projects in March after two straight months of declines. A pickup in single-family home construction and commercial projects offset a steep drop in state and local government building.

The 0.1 percent gain left construction spending at a seasonally adjusted annual rate of $808.1 billion, the Commerce Department said. That’s roughly half the level of what economists consider to be healthy.