U.S. Factory Activity Gauge at 30-Month High

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By Lucia Mutikani

WASHINGTON -- A gauge of U.S. factory activity hit a 2½-year high in November and construction spending increased solidly in October, brightening the economic outlook as the year winds down.

Monday's reports were the latest indication the economy was gaining strength despite the fiscal headwinds and could bring the Federal Reserve a step closer to scaling back its massive monetary stimulus.

"The economy is moving forward at a moderate to strong pace," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. "This is additional evidence that the economic outlook is positive enough and expected to continue long enough and that the Fed might actually taper in December."

The Institute for Supply Management said its index of national factory activity rose to 57.3 last month, the highest reading since April 2011, from 56.4 in October. A reading above 50 indicates expansion in the factory sector.

Last month's reading outstripped forecasts for 55.0 and was the sixth consecutive month of growth in the goods-producing sector since a contraction in May.

The ISM report mirrored a separate index released by financial data firm Markit, which showed manufacturing rebounding to a 10-month high in November.

The signs of strength in the two surveys are at odds with so-called hard data such as durable goods orders, industrial production and factory payrolls which have all pointed to some slowing in manufacturing activity.

While these sentiment surveys might be overstating the pace of economic growth, they suggested an uptick in business spending and industrial production in the fourth quarter.

"The persistent strength in the ISM increases our confidence that business investment in the fourth quarter will bounce back from the contraction in the third quarter, %VIRTUAL-article-sponsoredlinks%but we remain of the view that this rebound will be limited," said Bricklin Dwyer, a U.S. economist at BNP Paribas in New York.

Business spending on equipment fell in the third-quarter for the first time in a year.

A separate report from the Commerce Department showed construction spending increased 0.8 percent to an annual rate of $908.4 billion, the highest level since May 2009, after falling 0.3 percent in September.

The reports added to data such as retail sales and nonfarm payrolls that have offered an upbeat reading of the economy despite October's 16-day government shutdown and an anticipated drawdown on inventories, both expected to undercut growth this quarter.

U.S. stocks were little moved by the data as traders awaited Friday's employment report for November. U.S. government bond prices were trading lower, while the dollar was marginally higher against a basket of currencies.

Fed policymakers next meet on Dec. 17-18 and minutes from their last meeting showed officials are preparing to reduce the pace of bond-buying in coming months as long as the economy continues to improve.

The increase in construction spending in October was double economist expectations for a 0.4 percent gain and driven by a 3.9 percent jump in public construction projects. That was the largest increase since March 2004.

Government Spending Rises

State and local government outlays posted the biggest advance since February 2009, adding to evidence of improving budgets after years of belt-tightening. The increase in spending on federal government projects was the largest in nearly three years.

The sturdy gains in public construction spending suggest overall government spending will likely increase again in the fourth quarter. Government spending ended three straight quarters of declines in the July-September period.

"State and local construction spending has now crossed solidly into positive territory in year-on-year terms, consistent with the improvement in state and local revenue trends," said Carl Riccadonna, senior U.S. economist at Deutsche Bank Securities (DB) in New York.

"The sequester is set to continue to weigh on federal spending in 2014, but this drag will be significantly diluted by increased outlays at the state and local level."

Private sector investment in residential and nonresidential structures will probably remain on a slow path after spending on private construction projects fell in October.

But an anticipated pick-up in business spending, industrial production and demand for long-lasting manufactured goods should help to mitigate some of that slowing.

The ISM survey showed the forward-looking new orders index jumped to its highest level since April 2011. A gauge of order backlogs also surged and inventories dropped. Imports fell, while export orders jumped.

"A recovering global economy appears to be helping domestic manufacturers," said Michael Feroli, an economist at JPMorgan (JPM) in New York.

"The cooling in the import index may indicate that some of last quarter's inventory gain was due to stronger imports, and the inventory payback this quarter could partly pass over domestic factories and instead be felt in weaker import growth."

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U.S. Factory Activity Gauge at 30-Month High
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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