U.S. manufacturing activity accelerates

The growth in manufacturing accelerated in the final month of 2009, according to data released Monday, a sign that recovery of the long-beleaguered sector remains on track.

The strong reading contributed to a bullish start to 2010 on Wall Street, as the Standard & Poor's 500-stock index was up 1.6 percent Monday. The Dow Jones industrial average rose 156 points, or 1.5 percent, and most European and Asian markets rose by similar amounts. Besides the new economic data, investors reacted favorably to speeches by two top Federal Reserve officials on Sunday that they interpreted to mean that the central bank will keep interest rates low well into the future.

The Institute for Supply Management said that its index of manufacturing activity was 55.9 in December, up from 53.6 in November. Numbers above 50 indicate that the sector is expanding, as has been the case for five straight months.

Manufacturers are cranking up production to rebuild business inventories that firms let shrink during the depths of the recession, and the report included a particularly strong read on new orders, which bodes well for the future.

But not all of Monday's economic news was rosy. A Commerce Department report said construction spending declined 0.6 percent in November, as construction of housing and commercial buildings declined.

The manufacturing survey is the latest evidence that the nation's industrial sector is picking up steam. While the numbers are too small to suggest that the economy will snap back to health, it is promising news.

"It looks like we're getting a solid, not necessarily spectacular, but a very solid recovery in manufacturing," said Paul Ashworth, senior U.S. economist for Capital Economics.

In particular, survey respondents indicated strong growth in new orders, with that index rising to 65.5 from 60.3. New orders generally presage higher activity in the future.

And the employment index ticked up as well, to 52 from 50.8, suggesting that manufacturers cut back on jobs and hours so much during the downturn that they have had little choice but to add workers as they have started producing more.

Manufacturing companies cut 41,000 jobs in November, according to the Labor Department, but that was far lower than the 171,000 jobs per month slashed in the first half of the year. Some forecasters expect the number to have turned positive in December; that data is scheduled to be released Friday.

More so than service industries, manufacturers benefit from the inventory cycle. When times are bad, businesses draw down the goods on their warehouse and store shelves rather than order new ones. But when sales pick up, manufacturers must ramp up rapidly because firms have so few goods to sell.

"With customer inventories perceived to be so low, there is a strong case for production to grow," said Abiel X. Reinhart, an economist at J.P. Morgan Chase. That said, the inventory effect may fade as businesses get back to more normal levels, leaving in question what growth will look like later in the year.

Part of the manufacturing rebound since the summer has come from the auto industry returning to more normal functioning. Even as the impact of the "Cash for Clunkers" program has long since faded, that industry has held up well.

"Demand from automotive remains strong, with some plants not having extended shutdowns during the Christmas holiday," said one unnamed metal products company quoted in the Institute for Supply Management's report.

The construction spending data was more dour, as major parts of that industry continue to work through their hangover from overexpansion during the boom years.

Residential construction fell 1.6 percent, reflecting a home-building industry that has been slow to get back on its feet despite stabilization in home sales numbers and depletion of excess inventories.

The commercial real estate sector continues having troubles of its own; while construction spending was down just 0.2 percent for the month, many forecasters expect such spending to decline more sharply in the future, as builders are unable to gain financing for new construction and there is a glut of commercial buildings.

"The outlook for commercial property just looks grim," Ashworth said. "I suspect it will keep contracting for at least all of this year."