It's The Economy Stupid: It's Good or Bad, Depending On How You Look At It

Manufacturing expands at fastest pace since June

 

 

U.S. factories grew in January at the fastest pace in seven months, boosted by a rise in new orders. And builders ended a poor year for construction by spending more on homes and projects for the fifth straight month.

 

The Institute for Supply Management, a trade group of purchasing managers, said Wednesday that its manufacturing index rose last month to 54.1 from 53.1 in December. Readings above 50 indicate expansion.

 

Consumers are buying more cars and trucks, while businesses ordered more machinery and other equipment. That has driven factory output. The sector has expanded for 29 straight months, according to the index.

 

The Commerce Department said spending on construction projects rose 1.5 percent in December, the fifth straight monthly gain. That pushed spending to a seasonally adjusted annual rate of $816.4 billion, the highest level in 20 months.

 

Still, the construction industry remains weak. Spending on all building projects in 2011 was just $787.4 billion. That's 2 percent lower than the previous year and roughly half the level economists consider healthy.

 

Still, U.S. factories are vulnerable to economic shocks.

 

Exports are likely to decline if Europe suffers a recession, as many predict.

 

And the key reason the economy grew at an annual rate of 2.8 percent in the final three months of last year was that companies restocked their warehouses. That kept helped drive factory output at the end of last year.

 

Most economists say that restocking is certain to slow in the first quarter of this year.

 

Unless consumer spending picks up, businesses won't be able to sell off that extra inventory, and may have to cut back on future orders.

 

Consumers increased their spending only 2 percent in the final three months of last year. Many have been weighed down by wages that haven't kept pace with inflation.

 

They need more jobs and higher pay. Hiring has picked up in recent months, but the unemployment rate is still high, at 8.5 percent.

 

Business spending on equipment and software rose in the final three months of last year, but at the slowest pace since the recession ended, the government said last week.

 

Most economists expected the combination of weaker inventory growth and tepid consumer spending will lead to slower growth in the January-March quarter. Many are predicting just 2 percent annualized growth in that stretch.