- The Washington Times - Friday, January 2, 2004

One last piece of the economic recovery began falling into place as a key gauge of manufacturing rose to a 20-year high last month.

The Institute for Supply Management reported yesterday that its manufacturing index jumped to 66.2 from 62.8 in November — the highest since December 1983 for a sector that was the hardest hit in the recession.

Capping a sixth straight month of expansion in manufacturing, it was the first sign of how the economy fared going into the new year.

The remarkable and unexpectedly robust comeback for U.S. industry, which has lost nearly 3 million jobs since 2000, owes much to the rapid fall of the dollar in the last two years. The cheaper dollar has made U.S.-made products more competitive and attractive to foreign buyers, sparking a recovery in manufactured exports and a turnaround in the trade deficit.

“The new year is beginning with a fast start,” said John Park, economist with Kudlow & Co. Since the manufacturing index closely foreshadows growth in the industrial sector, he said, yesterday’s report suggests that industrial production could skyrocket by 5 percent in the first half of 2004, and maintain much of that momentum at the end of the year.

The institute said that the month’s gains were broad-based, with 17 of 20 industries reporting growth, led by instruments and photographic equipment, leather and furniture. A component index tracking new orders, which reflects both domestic and overseas demand for goods, reached its highest level since 1950.

“The number is stunning,” said Mark Spindel, chief investment officer of International Finance Corp., an arm of the World Bank. Growth is returning at a pace few expected on Wall Street. The report touched off a strong stock rally yesterday morning, with the Dow Jones Industrial Average initially rising by 75 points.

But the report also sent yields sharply higher in the bond market out of fear that the strong revival of manufacturing could touch off inflation and force the Federal Reserve to raise interest rates this year. The prospect of rising interest rates sent the Dow and other stock indexes sharply lower by the end of trading, with the Dow closing down 44 points at 10,410.

Prices for copper, oil, gas, gold and other key commodities used by manufacturers have been rising as a result of the pick-up in the world economy last year, but lingering weakness had prevented manufacturers from passing those higher costs on to consumers. The emerging boom in demand for manufactured goods, however, could give companies more wherewithal to raise prices, economists said.

Mr. Park said that even though the report points to greater industrial strength than had been anticipated, he doesn’t foresee higher inflation.

“We expect growth in 2004 will be pushed above 4.5 percent as inventory building begins,” he said. “Although some may be concerned about prices as the economic expansion accelerates, fast growth is not an automatic trigger for inflation. We believe this will be amply demonstrated this year.”

In another promising development — since manufacturing has been the principle source of U.S. job losses in the last three years — a measure of employment published by the institute also jumped last month to the highest level in four years.

Economists said the strength in the manufacturing employment index suggests that manufacturing may not only stop shedding jobs soon, but it may actually start adding jobs for the first time in years.

Manufacturers “don’t have much choice” but to start hiring again, said Norbert J. Ore, chairman of the institute’s manufacturing business survey committee, because they “cut so deep” during the retrenchment.

“A rapid recovery is taking place,” Mr. Ore said, with the momentum particularly evident in new orders, though a few manufacturing businesses have as yet to join in the upturn.

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