- The Washington Times - Tuesday, January 5, 2010

The first economic data released in the new year showed faster-than-expected growth in manufacturing activity last month, demonstrating that the recovery in factory output is gaining strength as the U.S. economy rebounds from its deepest recession since the end of World War II.

However, both private and public construction spending declined in November more than expected, signaling that the bottom in the beleaguered construction industry may still not be reached for some time.

Meanwhile, U.S. households and businesses submitted more than 1.4 million petitions for bankruptcy in 2009, marking the seventh-worst year on record, according to a tally by the Associated Press.

The manufacturing sector, which makes up about 12 percent of the U.S. economy, rapidly expanded last month, reaching its highest level in more than three years, the Institute for Supply Management (ISM) reported Monday. The ISM’s factory index jumped from 53.6 in November to 55.9 in December, its highest level since April 2006.

It was the fifth consecutive month that the factory index exceeded 50, the index’s fixed benchmark for a manufacturing sector that is neither expanding nor contracting. Index figures above 50 indicate expansion, while numbers below that neutral level reveal contraction. The December factory index was 23 points above its December 2008 level of 32.9, a 28-year low.

The internal details of the ISM’s manufacturing index showed major gains in new orders, which jumped 5.2 points to 65.5, the highest new-orders level since December 2006. The production index climbed to 61.8, and even the employment index surpassed 50 for the third month in a row.

“The new orders index has been above 60 in four of the last five months, suggesting that manufacturing has plenty of momentum heading into this year,” said Ryan Sweet of Moody’s Economy.com. Fourth-quarter activity in the manufacturing sector was consistent with Moody’s forecast that the U.S. economy expanded at an annual rate of 3.3 percent during the October-December period, Mr. Sweet said.

The U.S. economy grew at an annual rate of 2.2 percent during the July-September period after four consecutive quarters of falling output.

“Orders are a leading indicator and suggest continued economic gains in the manufacturing sector, as well as the overall economy for the first half of this year,” said John Silvia, chief economist of Wells Fargo.

But unlike the manufacturing sector, the building industry continues to decline as construction spending fell in November to its lowest level in more than six years.

Total construction spending dropped by 0.6 percent in November, the seventh consecutive month of decline, the Commerce Department reported Monday.

Private construction spending dipped 0.7 percent compared with October, led by a surprisingly large 1.6 percent drop in residential construction. Over the past 12 months, residential construction spending was down nearly 20 percent, led by a plunge in the building of multifamily housing, which caters to the depressed rental market.

“Residential construction spending has only bottomed, but has not yet started to climb out of its decline,” said Andres Carbacho-Burgos of Moody’s Economy.com.

“Tight credit and overbuilding are hammering multifamily housing construction, which has nearly ground to a halt,” said Patrick Newport, U.S. economist at IHS Global Insight. “The rental market is being hurt by falling housing prices and the tax credit for first-time homebuyers, which is swaying renters into becoming homeowners.”

Nonresidential private construction has fared worse than housing over the past year. It is down more than 20 percent, led by the collapse in commercial and office construction, both of which have plummeted by about 40 percent since November 2008.

Public construction spending, which peaked in July after a spurt in “shovel-ready” projects funded by the economic-stimulus plan, has been flat or falling since then. Although public construction was 2.7 percent higher than a year ago, it declined 0.4 percent in November. And its future does not look rosy.

“It is highly unlikely within the next year that public construction spending will experience a second burst of increase in real terms, given the severe fiscal crises that many state governments will face,” Mr. Carbacho-Burgos said.

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