U.S. Factory Index Rises for Sixth Straight Month

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The nation's factory sector continued to show an expansion in January, with the Institute for Supply Management's manufacturing index jumping to 58.4% from a revised 54.9% in December -- the fastest expansion pace since 2004, the ISM announced Monday. Further, the index remained above a level that indicates an expansion for the sixth straight month. Readings above 50% indicate an expansion; under 50%, a contraction. Prior to the six-month push above 50, the manufacturing index had been below 50 for about two years. A Bloomberg News survey had expected the index to dip to 55% in January. The index totaled 53.6% in November.

Another bright spot in January: The manufacturing index's new orders component, a measure of future demand, rose to 65.9 from 64.8% in December.

Four other key components of the index also rose in January. The production index rose to 66.2% from 59.7% in December; the employment index, to 53.3% from 50.2%; the inventories index, to 46.5% from 43.0%; and the prices paid index, to 70.0% from 61.5%.

In contrast, real consumer spending (adjusted for inflation) in December rose at the slowest pace since September, moving up just 0.1%, the U.S. Commerce Department announced Monday. In Q4, real spending rose at a 2% annual rate; however, real spending is still down 0.5% since December 2007, or when the recession began roughly two years ago. Also real, after-tax incomes rose 0.3% in December, and the U.S. savings rate rose to 4.8%.

ISM Chairman Likes the Industrial Trend

Norbert J. Ore, chairman of the ISM's Manufacturing Business Survey Committee said he likes what he sees regarding manufacturing activity.

"This month's report provides significant assurance that the manufacturing sector is in recovery. Both the new orders and production indexes are above 60%, indicating strong current and future performance for manufacturing," Ore said in a statement. "This month, 13 of 18 industries reported growth, up from nine industries last month, and this is a good indication that the impact of the recovery is expanding."

In January, respondents' comments mostly indicated an ongoing U.S. economic recovery, with rising demand: "Overall activity is significantly higher than we typically see this time of year" (machinery sector). "Orders from automotive very strong" (electrical equipment, appliances and components sector). "Commodity prices are moving up again." (printing and related support activities sector). "Lead times continue to be a problem for electronic components" (computer and electronic products sector). "We now believe that we will not have a good upturn until the 3rd quarter of 2010" (primary metals sector).

Economic Analysis

It was another encouraging, monthly performance by the U.S. manufacturing sector in January: The nation's industrial output continues to rebound after a roughly three-year contraction. Aside from the top-line ISM index rise, the two most important take-aways from the January ISM factory report: 1) the impressive rise in the new orders component -- it's a tell-tale stat regarding future demand, and it's been rising for seven months -- a bullish sign for the immediate quarters ahead; and 2) the employment component, which jumped three points and has risen for the past two months -- the first time that's happened since the recession started in December 2007.

Bottom Line from the January data: The U.S. recovery is strengthening and appears to becoming more broad-based after some initial choppiness.
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