Markets upbeat at start of year
Tuesday, January 4, 2011
Financial markets began the year on the upswing, as fresh economic data pointed to accelerating growth and a brighter outlook for 2011.
The Standard & Poor's 500-stock index ended up 1.1 percent on Monday, extending a 13 percent gain in 2010. The Dow Jones industrial average was up 0.8 percent, while the Nasdaq rose 1.5 percent. It was enough to push the Dow - along with oil and many other commodities - to two-year highs.
The increases followed reports providing more evidence that the U.S. economic recovery is gaining momentum. The Institute for Supply Management's index of activity at manufacturing firms rose to 57 in December, from 56.6, indicating the strongest pace of expansion at the nation's factories since May.
Some of the fine print of the purchasing managers trade group report was even sunnier. Two key forward-looking indicators rose sharply, suggesting that both December and future months' industrial output could continue on a positive note. New orders for manufactured goods rose to 60.9 from 56.6, and production rose to 60.7 from 55.
The components "show a generally encouraging picture," said Dan Meckstroth, chief economist for the Manufacturers Alliance/MAPI, a trade group. "A surge in orders and production that is driven by fundamentals rather than inventory rebuilding is a solid base to maintain a recovery."
However, the report also pointed to evidence that rising prices for a wide range of commodities - as varied as oil, copper and grains - are squeezing the manufacturing companies that use those items to produce finished goods. The index of prices rose to 72.5 from 69.5.
"The end of the year is surprisingly busy," said an unidentified computer and electronic products firm cited in anecdotal commentary accompanying the report. "Strong pressure exists on raw material prices in almost every area," said a plastics and rubber products company.
A similar index that tracks European manufacturing activity showed an even stronger gain, rising to 57.1 from 55.3. That helped drive up European stock markets and create a global rally on the first trading day of the year. The French stock market was up 2.5 percent, the German market up 1.1 percent.
A separate report released Monday by the Commerce Department showed that U.S. construction spending rose 0.4 percent in November, better than the 0.2 percent gain that economists had forecast. Construction spending has now risen for three straight months following a long, steep decline, and economists take that as evidence that building activity may have bottomed out, although few think that a steep rebound is in the cards given the glut of residential and commercial buildings built during the past decade.
"It is too soon to tell if this sector, which has been in decline since March 2006, hit bottom in August 2010," said Patrick Newport, an economist at IHS Global Insight. "If it did, a solid rebound is unlikely."
In particular, public-sector construction spending rose 0.7 percent in November, and economists worry that that sector could turn negative as federal stimulus spending winds down and states face deep budget cuts.
Monday's data follow other recent positive signals on the economy. The holiday shopping season appears to have been the best since the recession began at the end of 2007; the number of people filing claims for unemployment insurance benefits fell to its lowest level since summer 2008 in the most recent weekly report; and financial markets marched steadily upward through the end of the year.
Interest rates edged higher on the good economic news, with the rate on 10-year U.S. Treasury bonds rising to 3.34 percent, from 3.3 percent.
Commodity prices were up, though not dramatically so. The price of oil settled at $91.55 per barrel at the end of the trading day, up 0.2 percent. Oil is now at its highest level since October 2008.