Manufacturing rebound spurs biggest stock rally in months

By Frank Ahrens
Wednesday, September 1, 2010; 8:43 PM

After their worst August in nine years, stocks kicked off September with a big snap-back rally, following the release Wednesday of surprisingly good news about the U.S. manufacturing sector.

Manufacturing activity jumped unexpectedly in August, according to the Institute for Supply Management, which calculates an index that shows whether U.S. manufacturers are cranking up or gearing down.

The ISM index for August jumped to 56.3, up from 55.5 in July. Forecasters expected the August number to retreat to 53.2, following weeks of disappointing U.S. consumer spending and confidence data. Any number higher than 50 indicates that the economy is growing.

The stock market, which endured a month-long August sell-off and appeared eager for any good news, kicked off a day-long rally in response to the data.

After losing 4.3 percent last month, the Dow Jones Industrial Average rose 2.5 percent Wednesday to close at 10,268.47. All 30 Dow stocks closed up on the day. So far this year, the Dow is down 1.5 percent.

The broader S&P 500 closed up 2.9 percent, at 1,080.29. This puts the S&P 500 just above what is known as the key technical level of 1,080, meaning that if stocks pass up through 1,080, traders expect the rise to continue based on historical performance.

The tech-heavy Nasdaq closed up 2.9 percent, at 2,176.84.

In typical fashion, gold retreated as stocks rose, with the precious metal moving back from its recent highs, closing at $1,246.30 per ounce.

According to the Wednesday ISM data, manufacturers that experienced growth last month included those that make computers, chemicals, clothing, cars and airlines and primary metals, which are used in heavy industry. August manufacturers that lost business included those that make furniture, coal, petroleum products and machinery.

Despite decades of losing manufacturing jobs to cheaper labor overseas, the United States is still the world's largest manufacturing economy.

Manufacturing had increased earlier in the year as businesses, which had let their inventory decline during the recession, began to restock their shelves. But then manufacturing flattened out, until ticking upward again last month.

Not all economic news Wednesday was positive, but the markets didn't seem to care.

The private sector lost 10,000 jobs in August, according to ADP employer services, breaking six months of modest increases. This is worrisome because the private sector has been largely unwilling to make the broad-based hires necessary to bring down the official national unemployment rate of 9.5 percent. Almost all job growth has come from government hiring, and much of that from the Census, which concludes this fall.

Also, July construction spending fell to its lowest rate in 10 years, the Commerce Department said on Wednesday, in line with other recent data that have shown a precipitous decline in sales of new and existing homes, as well as a drop-off in building permits, following the end of the government's home-buyer tax credit, which expired at the end of April.

Finally, August auto sales were down compared with the same month last year, but sales in that month were artificially inflated by the government-subsidized cash-for-clunkers program.

As has been the case with recent data, Wednesday's numbers indicate that the tepid U.S. recovery has been largely based on government stimulus and that growth has faded without subsidies.

The conflicting data released Wednesday do little to clarify whether the U.S. economy is heading into a double-dip recession.

"My view of the data is that it delays the consensus shift to a double dip-forecast but is not a sign that the economy is accelerating," said Steven Ricchiuto, chief economist with Mizuho Securities USA, who called today's data a "mixed bag."

Majestic Research senior economist Steve Blitz likened today's mixed data to a ".0 baseball team."

"Over any 10 game period the team can look like world beaters or cellar dwellers, but in the end it evens out to an equal number of wins and losses," he said. The U.S. economy is growing at a 2 percent rate - about half what it would be in healthy times - but Blitz said that equates to an effective growth rate of zero percent, in terms of eating away at excess capacity in capital and labor.

Earlier in the week, bearish New York University economist Nouriel Roubini upped his estimate of a double-dip recession to a greater than 40 percent chance.

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