3 January 2003, 11:02  U.S. Economy: Manufacturing Index Rises in December

/www.bloomberg.com/ By Carlos Torres
Washington, Jan. 2 (Bloomberg) -- U.S. manufacturing increased in December by the most in 11 years, an industry report showed, reinforcing expectations that the economic recovery will strengthen this year.
Increases in orders and production lifted the Institute for Supply Management's factory index to 54.7 in December, topping all 43 economist forecasts in a Bloomberg News poll. The index exceeded 50, the dividing line between contraction and expansion, for the first time since August and rose from 49.2 in November.
The increase was the largest since June 1991, and Treasury securities plunged while stocks surged because ``the economy is mending,'' said Joseph LaVorgna, an economist at Deutsche Bank Securities Inc. His was among the highest forecasts in the survey.
The U.S. economy may grow at a 2.5 percent annual pace in the next three months, up from a projected 1.5 percent last quarter, a Bloomberg economist poll showed. General Motors Corp., the world's largest automaker, plans to build more vehicles this quarter than in the first three months of 2002.
``We suspect that the factory sector is starting to stabilize after a rough second half of 2002,'' Morgan Stanley economists David Greenlaw and Ted Wieseman wrote in a report. ``However, we also believe that the December ISM survey probably overstates the extent of improvement.''
The survey's chairman had a similar view. While manufacturing may recover this half, ``I'm just not sure it will be this intense,'' said ISM's Norbert Ore. ``I don't think it's time to pronounce manufacturing is ready to make a strong recovery.''
States received 403,000 new claims for unemployment benefits last week, up from a revised 390,000 a week earlier, the Labor Department reported today. European manufacturing shrank for a fourth month, a separate report showed.
Orders Surge
The benchmark 4 percent Treasury note maturing in November 2012 fell about 1 7/8 points, pushing the yield up 23 basis points to 4.04 percent, at 4:10 p.m. New York time. The Standard & Poor's 500 Index rose 28 points, or 3.3 percent, and the Dow Jones Industrial Average jumped 266 points, or 3.2 percent.
The Institute for Supply Management's new-orders index, which accounts for about a third of the total, had the biggest one-month point gain since August 1980. That helped push its factory index above 50, the median Bloomberg survey forecast.
The new-orders index rose to 63.3, the highest since March, from 49.9 in November. The production index, a gauge of work being performed, increased to 55.6 from 54.6.
Predicting Fed Policy
The Tempe, Arizona-based institute surveys more than 400 companies in 20 industries, including clothing, printing, transportation, furniture and plastics. Manufacturing accounts for about a seventh of the economy.
The factory index -- also called the Purchasing Managers Index -- is a ``strong predictor of changes in monetary policy,'' according to a study released today by the Dallas Federal Reserve Bank. Dallas Fed senior economist Evan Koenig said the survey ``captures information about GDP growth beyond that contained in the Federal Reserve's report on industrial production and official government reports on employment and retail sales.''
Fed forecasting models should include the factory index as well as ``real-time inflation, unemployment and jobs-growth data,'' Koenig wrote.
All 63 economists in a Bloomberg News survey in December expect the Fed to hold the benchmark bank overnight lending rate steady at 1.25 percent when they meet Jan. 29.
A Lasting Improvement?
Next month's report may help tell whether the improvement is lasting, said David Huether, chief economist at the National Association of Manufacturers, the country's largest industrial trade group representing 14,000 members. If the index remains above 50, ``it will be a good indication that the overall up tick in business investment is starting to come, and that is really what we are waiting for,'' he said.
The index of inventories rose to 46.2 from 42.1, indicating inventories are being run down at a slower pace. The index of stockpiles is the highest since August 2000. The employment index increased to 47.4, the highest since June, from 43.8.
The backlog of orders index rose to 46.5 from 42.5. The new export orders index rose to 52.2 from 49.1. The index of supplier deliveries rose to 51.4 from 50.8, while the prices-paid index increased to 56.9 from 55.7.
Manufacturing is still struggling abroad. An index based on a survey for Group Plc of purchasing managers at 2,500 companies based in the dozen countries sharing the euro fell to 48.4 last month from 49.5 in November. The index has been below 50, signaling contraction, since July.
Auto Production
U.S. production may be starting to pick up. General Motors, the world's largest automaker, said last month it plans to increase combined North American production of cars and trucks 3.5 percent this quarter from the same three months last year.
One rival is more cautious. DaimlerChrysler AG's Chrysler unit will likely build fewer vehicles this quarter than the 632,605 it produced a the year-earlier quarter, Chrysler Chief Executive Dieter Zetsche said in an interview.
``There is still a lot of uncertainty at this point of time and I hear relatively few people who think everything will be perfect,'' Zetsche said. Chrysler will probably temporarily idle ``a few'' plants and work less overtime to reduce production.
States received 403,000 initial jobless claims last week, up from a revised 390,000 a week earlier, the Labor Department said. Economists had expected claims to rise to 380,000 from a level of 378,000 that was originally reported for the prior week, based on the median of 17 forecasts in a Bloomberg News survey.
Jobless Claims Rise
The four-week moving average, which smoothes out weekly volatility in claims, rose to the highest number in three months at 418,750. It was the third straight reading above the 400,000 mark that economists consider a weak labor market.
Companies have cut jobs as businesses control spending, consumer confidence hangs near a nine-year low, and factories become more efficient. The four-week moving average, which smoothes weekly volatility, rose to 418,750, the highest in three months, from 407,500. It was the third straight reading above the 400,000 mark that economists consider a weak labor market.
``You have very little new job creation, which means about the same number of people are finding jobs as losing jobs,'' said Henry Willmore, chief U.S. economist at Barclays Capital Inc.
Today's report showed the number of people continuing to collect state jobless benefits fell to 3.418 million in the week ended Dec. 21. It was the second straight drop and compares with a 19-year high of 3.83 million in the week that ended May 3.
The insured unemployment rate, which tends to track the U.S. jobless rate, held at 2.7 percent in the week that ended Dec. 21.
The report completes a year in which claims averaged 405,000, less than the 406,000 in 2001, when the U.S. entered a recession in March.

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