Cranking It Up: Manufacturing grows after 19 months

The U.S. manufacturing sector grew in August for the first time in 19 months, adding to evidence that the recession is ending.

The better-than-expected reading yesterday by the Institute for Supply Management, or ISM, showed the highest number for its manufacturing index since June 2007. New customer orders jumped to a level not seen since late 2004.

In another sign of an improving economy, a gauge of future U.S. home sales rose more than expected in July to the highest point in more than two years.

The reports raised hopes for a broad economic rebound. Still, as long as consumers remain hamstrung by weak pay and job losses, and wary of ramping up spending, the economy might not be able to sustain a recovery.

Consumers did buy more cars last month, mainly because of the popular "Cash for Clunkers" program, which increased Ford Motor Co.'s U.S. sales 17.2 percent over last year. Shortages of smaller vehicles weighed on rival Chrysler.

The clunkers program, which ended Aug. 24, spurred 690,114 new sales, at a taxpayer cost of $2.88 billion by offering up to $4,500 toward new, more fuel-efficient cars and trucks.

"Manufacturing will continue to expand," but capital investment will decline because plants have too much excess capacity, said Daniel Meckstroth, the chief economist for the Manufacturers Alliance, a trade group. "You're going to see ups and downs."

On Wall Street, stocks fell despite the positive housing and manufacturing reports. Analysts said that much of the improving economic data already were priced in after a six-month climb in stocks. The Dow Jones industrial average lost about 185 points, or 2 percent, to close at 9,310.60. The S&P 500 fell 22.58, or 2.2 percent, to 998.04, and the Nasdaq composite index fell 40.17, or 2 percent, to 1,968.89.

The ISM, a trade group of purchasing executives, said that its manufacturing index rose to 52.9 in August, from 48.9 in July. It's the first reading above 50, which indicates expansion, since January 2008. Analysts polled by Thomson Reuters had expected a reading of 50.5.

New orders jumped nearly 10 percentage points to 64.9 in August, their highest level since December 2004. With strong new orders for two straight months, production should grow at "reasonable rates" for the rest of the year, said Norbert Ore, the chairman of ISM's manufacturing survey.

A weaker dollar also helped exports grow for the second straight month, after shrinking for nine, according to ISM. The index, which includes new orders, production, employment, inventories, prices and more, is based on a survey of the group's members.

The current growth in the U.S. manufacturing sector has been historically equivalent to a 3.7 percent increase in gross domestic product, Ore said. GDP shrank 1 percent in the second quarter, but many economists expect the recession ended over the summer.

Other countries also reported a revival in international trade. In China, a state-sanctioned survey and a private bank report showed that the country's manufacturing sector grew at its fastest rate this year in August as the government's stimulus spending plan kick-started production. Chinese exports are still down sharply from last year but have improved in recent months.

Exports can help the U.S. recovery, Meckstroth said, but can't make up for a tightfisted consumer. And while manufacturing may add to GDP, it's not going to help curtail unemployment.

"Manufacturing hasn't added a net new job in 30 years," Meckstroth said.

Manufacturing has steadily shrunk as a sector of the U.S. economy, and the ISM has been trending lower since a peak reading this decade of 61.4 in May 2004.

Still, businesses say they believe that their customers' inventories are still too low, Ore said, and restocking shelves could help increase production later this year.

Also yesterday, the National Association of Realtors said that its seasonally adjusted index of sales contracts signed in July for previously occupied homes rose 3.2 percent to 97.6. It was the sixth straight increase and 12 percent above the same month last year.

Economists surveyed by Thomson Reuters expected the index would edge up to 96.5.

U.S. construction spending dipped in July as weakness in nonresidential building and government projects offset the best showing for home building in 10 months.

The Commerce Department said that construction spending slid 0.2 percent in July, worse than the flat reading that economists had expected. The drop followed a 0.1 percent rise in June.

Even with the rise in home building, residential construction was 27.8 percent below the year-ago level. However, the increase was further evidence that the beleaguered housing sector could be staging a comeback after a severe collapse which helped push the country into the longest recession since World War II.