Manufacturing Speeds Up as Consumers Spend Away

Wed Dec 1, 2004 12:34 PM ET

By Pedro Nicolaci da Costa

NEW YORK (Reuters) - The outlook for U.S. manufacturing improved in November as factories hired more workers in response to a jump in new orders, a national survey published on Wednesday showed.

Coupled with news of a solid start to fourth-quarter consumer spending, the Institute for Supply Management's factory report suggested the economy is likely to sustain recent growth levels.

The ISM's index of national manufacturing climbed to 57.8, even though the production index slipped, from 56.8 in October. The overall number surpassed forecasts of a smaller gain to 57.0.

"It shows manufacturing activity remains quite strong," said Gary Thayer, chief economist at A.G. Edwards and Sons.

Overall, the data confirmed what most analysts already believed -- the economy is growing robustly enough to allow the Federal Reserve to keep raising interest rates but is unlikely to experience a renewed spurt of expansion any time soon.

A reading above 50 in the ISM index indicates growth in the factory sector, which represents about one-sixth of the $10.9 trillion U.S. economy. November marked 18 months of expansion in manufacturing.

Consumers also did their part for the economy, with spending up a solid 0.7 percent in October, exceeding analysts' predictions and defying a spike in inflation.

That figure offset worries about lackluster retail sales over the Thanksgiving weekend, a key marker of holiday shopping trends. But spending, too, has its downside.

"The result of this increase in consumption on the back of growth in income is that the savings rate fell to 0.2 percent," noted Drew Matus, U.S. financial markets economist at Lehman Brothers.

"That means for a person earning $40,000 per year they are saving $80. Put another way, that person is saving a little over $1.50 per week."

While they may be short on savings, consumers are usually more comfortable spending money when they feel secure about their jobs.

ISM's employment measure spelled good news on the hiring front. It rose to 57.6 from 54.8, stirring hopes that Friday's November employment report could show another burst of job creation.

Norbert Ore, chair of the ISM Business Survey Committee, said a number of industries reported substantial growth in hiring, notably food, electronics, primary metals, transportation, industrial equipment and computers. as well as printing and publishing, which had been lagging.

"There was some real strength," he said, "and even the next five industries below those 10 that reported they were hiring, reported no change."

The production gauge fell to 57.0 from 58.9, but the future looked brighter with new orders spiking to 61.5 from 58.3.

However willing they might be to shop, rising interest rates were beginning to dent Americans' appetite for home mortgages.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage activity fell 5.8 percent to 673.3 in the holiday-shortened week ended Nov. 26, following a 5.7 percent drop the previous week.

U.S. construction spending also disappointed by remaining flat in October, indicating the sector would add less to fourth-quarter GDP than economists expected.

That might help explain why U.S. chief executives became less optimistic over the past quarter, although half still said they plan to increase capital spending over the next six months.

The Business Roundtable's Economic Outlook Index slipped to 98.9 in the December survey from 101.7 in September. The group of U.S. CEOs expects gross domestic product to grow 3.5 percent in 2005, compared with 4 percent in 2004.

On Tuesday, the government said U.S. third-quarter gross domestic product grew at a 3.9 percent pace, up from an earlier estimate of 3.7 percent, much of it fueled by relentless consumer spending.

(Additional reporting by Tim Ahmann in Washington and Dean Patterson and Ellen Freilich in New York)