U.S. manufacturing activity should grow next month for the first time since January 2008 as industrial companies work to restock customers' bare shelves, a trade group said Monday.
The Institute for Supply Management's better-than-expected report, improving manufacturing data overseas and a surprise jump in U.S. construction spending in June, helped push stock markets higher. Following last week's report that the U.S. economy shrank less than expected in the second quarter, many economists believe the longest recession since World War II may be over, though any recovery will be subdued.
The ISM, a trade group of purchasing executives, said its index measuring U.S. manufacturing activity in July showed the slowest pace of decline since last August. The 48.9 reading was up from 44.8 in June. Production and new orders jumped to their highest level in two years, while new export orders grew after shrinking for nine months.
"If we stay on trend ... we would expect to be above 50 next month," said Norbert Ore, chair of ISM's manufacturing survey committee. A reading above that threshold would indicate growth in manufacturing, something that hasn't happened in 18 months.
Meanwhile, the Commerce Department said construction spending rose by a seasonally adjusted annual rate of 0.3 percent in June led by gains in government and residential housing projects. Analysts expected a 0.5 percent drop. The data follow earlier reports of growing home sales and construction in June, fresh evidence that the housing sector may be recovering.
The ISM report mirrored improving readings on the industrial sectors in China and Europe, helping send global stock markets mostly higher.
The Dow Jones industrial average added more than 100 points in afternoon trading, and broader indices also rose.
The pace of decline in manufacturing has been slowing since the index hit a 28-year low of 32.9 in December. And it was the third straight monthly reading above 41.2, which tends to indicate expansion in the overall economy, if sustained at such levels, according to the ISM.
"This adds to the growing evidence that the recession ended around the middle of the year," Capital Economics U.S. economist Paul Ashworth wrote in a research note.
The Commerce Department said last week that the nation's gross domestic product shrank at an annual rate of 1 percent in the second quarter. That's a drastic improvement from the 6.4 percent decline in the first quarter and a 5.4 percent decline in the fourth quarter of 2008.
The GDP report did show that businesses cut their stockpiles at a record pace, but that means companies likely will need to increase production to meet customer demand. The ISM index in July showed production at its highest level since June 2007.
Consumer spending fell
Consumer spending, however, declined in the second quarter. Consumer spending powers the U.S. economy, making up about 70 percent of economic activity. Without a recovery there, economists fear ongoing strength in manufacturing is unlikely.
"The recovery will be below average and it will take many years to reach the pre-recession production level," as strapped consumers continue to work off their debt while unemployment grows, said Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI, a trade group.
The "debt-based" spending of years past is not going to be able to help resuscitate the economy this time around, he said.
While the ISM index may be technically close to growth, comments from the trade group's members are "depressing," Ore said.
"The data is more positive than they are," he said on a conference call. The index is based on a survey of the Tempe, Ariz.-based group's members.
The ISM data tracking employment contracted for the 12th straight month, although at the slowest pace since last September.
Mass layoffs continue as major manufacturing companies hit by shrinking revenue cut costs deeply to boost profit levels.
Electronics giant Motorola Inc., for example, last week posted an unexpected profit of $26 million in the second quarter, even as sales dropped 32 percent. The company has cut 8,000 jobs this year to help offset income losses.
Unemployment in the U.S. hit 9.5 percent in June, the highest level in 26 years. Economists expect the jobless rate inched up to 9.6 percent in July. That report is due out Friday.