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Manufacturing sector expanded in January

/ Source: The Associated Press

The nation’s manufacturing sector expanded at a modest clip in January, recovering from the contraction seen in December, an industry group survey showed Friday.

After slipping to its lowest level in almost five years, the Institute for Supply Management said its manufacturing index rose last month to a reading of 50.7, up from a revised reading of 48.4 in the previous month.

A reading above 50 indicates growth, and below that level indicates contraction.

Though economists remain concerned about manufacturing, a portion of the economy that has been slammed particularly hard by the housing downturn, the Tempe, Ariz.-based private research group’s results were better than expected.

Analysts polled by Thomson/IFR Markets had predicted, on average, that the index would fall to 47.0, which would have indicated an even worse activity than in December.

The ISM report suggested that Federal Reserve rate cuts intended at boosting the economy might be doing their job, but that they may also be exacerbating inflation. The report’s prices index grew at a fast pace, rising to 76.0 in January from 68.0 in December.

The Fed has lowered key interest rates five times since last summer, and two of those rate cuts came in January.

Zinc was the only commodity whose price fell in January. Prices for other commodities — oil, natural gas, diesel fuel, chemicals, corn, soybean oil and steel — all rose or were in short supply.

And while business in the manufacturing sector expanded overall, the jobs within the sector declined further — mirroring the Labor Department’s report Friday that throughout the entire U.S. job market, employers cut payrolls by 17,000 last month, the first such reduction in more than four years.

The ISM report’s employment index fell to 47.1 from 48.7.

Strong industries in manufacturing included apparel, energy, food, appliances, primary metals, machinery and chemicals. Industries that saw contraction were nonmetallic mineral products, printing, wood products, furniture, fabricated metals, plastic and rubber, transportation equipment, and computer and electronic products.

Higher levels of production and an ever-rising number of exports, aided by a weak dollar, helped manufacturing expand in January.

The production index hit 55.2 in January, up from 48.6 in December.

The exports index rose to 58.5 from 52.5.

“A lot of it has been an export-driven story in the manufacturing sector,” said Kurt Karl, chief U.S. economist for Swiss Re, adding that manufacturing could contract again before the summer. “With zero employment growth and with wages offset by inflation, domestic demand is going to be very soft.”