- The Washington Times - Monday, January 4, 2010

Two reports Monday gave different indications about the direction of the U.S. economy.

An unexpectedly strong report on manufacturing activity bolstered confidence that the country’s factories will help sustain an economic recovery.

The Institute for Supply Management, a trade group of purchasing executives, said its manufacturing index read 55.9 in December after 53.6 in November. A reading above 50 indicates growth.

That is the fifth straight month of expansion and the highest reading for the index since April 2006. Analysts polled by Thomson Reuters had expected a reading of 54.3.

Meanwhile, the Commerce Department reported that construction activity fell in November for a seventh straight month as spending on both residential and commercial projects declined. The 0.6 percent drop was bigger than the 0.4 percent decline that economists had been expecting.

The ISM report said new orders, a signal of future production, jumped last month to 65.5 from 60.3 in November. Indexes measuring production and employment also rose.

The ISM’s manufacturing index first showed growth in August after 18 months of contraction. The index’s peak in the last decade was 61.4 in May 2004. It bottomed at 32.9 in the midst of the recession in December 2008.

“Overall, this was a very strong report, and it suggests that the recovery in the U.S. manufacturing sector is gaining further traction,” Millan Mulraine, an economist at TD Securities, wrote in a note to clients.

The ISM’s report showed that inventories held by manufacturers’ customers are still dropping, a sign of future gains as more sales will have to be filled through new production rather than existing stockpiles.

But economists also said that a more sustainable recovery will depend on increasing demand from consumers and businesses, not just replenishing inventories.

“Not until final demand is clearly firming are markets, or the Fed, likely to conclude that the economy is decisively beginning to lift off,” Pierre Ellis, an economist at Decision Economics, wrote in a note to clients.

Other measures of manufacturing around the world on Monday also showed growth. China’s manufacturing sector expanded at its fastest rate in 20 months in December, according to a purchasing managers’ survey. In Europe, a similar survey in the 16 countries that use the euro rose to a 21-month high and a manufacturing index for Britain rose to a 25-month high.

The stock market jumped on the first trading day of the year after the reports of stronger manufacturing activity around the world as well as a rise in oil prices. In midmorning trading, the Dow Jones industrial average rose 132.10, or 1.3 percent, to 10,560.15.

The weakness in the construction industry was widespread — with spending on housing falling by the largest amount since June and non-residential building dipping for an eighth consecutive month. While the overall economy began growing again this past summer, the worry is that weakness in such areas as construction will dim prospects for a recovery strong enough to reduce double-digit unemployment.

The 0.6 percent drop in construction activity in November followed a 0.5 percent decline in October which was revised downward from an original estimate showing a much smaller dip. The seven straight declines pushed construction spending down to a seasonally adjusted annual rate of $900.1 billion, the slowest pace in more than six years and 13.2 percent below the level of activity a year ago.

Private residential activity dropped by 1.6 percent in November to an annual rate of $250.7 billion after a big 4.8 percent surge in October, an increase that had been driven by builders trying to finish projects before the original November expiration for a popular home buyers tax credit, a tax break that has since been extended by Congress.

Spending on commercial projects from office buildings to factories and shopping centers edged down a slight 0.03 percent, the eighth straight drop.

Commercial building activity has been hurt by a severe credit crunch as developers are having trouble getting new financing from banks leery to extend further credit as default rates rise sharply for commercial real estate projects. The November drop pushed nonresidential building down to an annual rate of $330.5 billion.

Spending on government projects fell 0.4 percent to a rate of $318.8 billion reflected a 0.5 percent fall in state and local construction projects, an area that has been hurt by deep budget shortfalls caused by the recession. Spending on federal construction projects rose by 1.1 percent in November.

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