U.S. Factory Activity Intensifies in December

The pace of manufacturing activity accelerated in December. Key measures for new orders, inventories and production suggest the U.S. economic recovery will pick up speed in early 2011.

The Institute for Supply Management's manufacturing index increased to 57 in December from 56.6 -- its fastest growth pace in seven months and the 17th consecutive month manufacturing activity expanded.

Readings above 50 indicate an expansion; under 50, a contraction. A Bloomberg survey had expected the manufacturing index to rise 57.2; the index was at 56.9 in October, 54.4 in September, and 56.3 in August.

New Orders Increase Faster Than Inventories

In December, the closely watched new orders component -- a measure of future demand -- jumped 4.3 points to 60.9 from 56.6 in November. The inventories component fell 4.9 points to 51.8 from 56.7. With new orders rising faster than inventories, manufacturers may have trouble re-stocking shelves amid rising demand.

Two other components also point to a manufacturing sector that continues to gain steam. The production component jumped 5.7 points to 60.7 from 55 in November, and the employment component, although it dipped 1.8 points to 55.7, remained at a level that indicates factories are adding employees.

One sour data point in December concerned the prices component, which rose to 3 points to 72.5 from 69, with most commodity prices rising last month. For more than six months, manufacturers have expressed concern about rising raw material and commodity prices, which could push up production costs and cut into earnings.

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Norbert J. Ore, chairman of the ISM's Manufacturing Business Survey Committee, said December's report closed out a strong year for manufacturing in 2010, and he sees the sector's momentum carrying in to 2011.

"The manufacturing sector continued its growth trend as indicated by this month's report. We saw significant recovery for much of the U.S. manufacturing sector in 2010. The recovery centered on strength in autos, metals, food, machinery, computers and electronics, while those industries tied primarily to housing continue to struggle," Ore said, in a statement. "Additionally, manufacturers that export have benefited from both global demand and the weaker dollar. December's strong readings in new orders and production, combined with positive comments from the panel, should create momentum as we go into the first quarter of 2011."

Broad-Based Improvement

Respondents' comments in the December survey confirmed improving industrial conditions, for most segments:
"Company outlook looks positive into 2011. Solid revenue growth across the globe driven by strong volume in Q3 and Q4 2010" (chemical products sector);

"We continue to see strong demand for our product in Europe and Asia" (electrical equipment, appliances and components sector);

"The end of the year is surprisingly busy" (computer and electronic products sector);

"Business remains slow, while vendors clamor for increases that should have no foundation in economics" (non-metallic mineral products sector);

"Strong pressure still exists on raw material prices in almost every area. It is unclear as to whether they can get them" (plastics and rubber products sector).
So, while rising commodity and raw material prices are a concern, nearly every other data point in December's manufacturing report revealed an intensifying pace of factory activity as 2010 ended.

In other words, the industrial sector activity that has led the U.S. economic expansion so far is accelerating, and that points to stronger U.S. GDP growth and probably an increase U.S.-based manufacturing hiring in early 2011.
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