An unexpectedly strong report on manufacturing activity Monday bolstered confidence that America's factories will help sustain an economic recovery.
The report by a private trade group signals that industrial production is likely to keep expanding in coming months, economists said. That could lead, in turn, to increased hiring and job creation.
The Institute for Supply Management, a trade group of purchasing executives, said its manufacturing index read 55.9 in December after 53.6 in November. A reading above 50 indicates growth.
It was the fifth straight month of expansion and the highest reading for the index since April 2006. Analysts polled by Thomson Reuters had expected a reading of 54.3.
But a separate report on construction spending sounded a more cautionary note. Construction activity fell in November for a seventh straight month as spending on both residential and commercial projects declined. The 0.6 percent drop was bigger than the 0.4 percent decline that economists had been expecting.
Increased spending on federal construction projects, likely fueled by stimulus spending, was largely canceled out by lower state and local construction spending.
Still, the ISM said its index of new orders, a signal of future production, jumped last month to 65.5 from 60.3 in November, the highest level in five years. That indicates the overall index should keep climbing and could near 60 in coming months, economists said.
The index's peak in the last decade was 61.4 in May 2004. It bottomed at 32.9 in the midst of the recession in December 2008.
"Overall, this was a very strong report, and it suggests that the recovery in the U.S. manufacturing sector is gaining further traction," Millan Mulraine, an economist at TD Securities, wrote in a note to clients.
Other measures of manufacturing around the world on Monday also showed growth. China's manufacturing sector expanded at its fastest rate in 20 months in December, according to a purchasing managers' survey. In Europe, a similar survey in the 16 countries that use the euro rose to a 21-month high and a manufacturing index for Britain rose to a 25-month high.
"What we're seeing is a global recovery in manufacturing that will be more pronounced than the economic recovery as a whole," said John Ryding, chief economist at RDQ Economics.
The report helped boost stock markets on the first trading day of the year. The Dow Jones industrial average surged 160 points in afternoon trading. Broader indexes also gained.
The ISM survey showed that inventories held by manufacturers' customers are still declining and are at their lowest level since the survey began tracking the category in January 1997. That's another sign of future gains because more sales will have to be filled through new production rather than existing stockpiles.
That could lead to increased hiring as manufacturers ramp up production. And a turnaround in employment could boost incomes and increase consumer spending, fueling the recovery.
The ISM's employment index rose last month to 52 from 50.8, the third straight month it has topped 50.
"When orders are increasing and inventories are going down, that could push up one major weak spot: employment," said Tim Quinlan, an economic analyst at Wells Fargo Securities.
The Labor Department will issue its employment report for December on Friday. Wall Street economists expect that employers cut a net total of 8,000 jobs last month and that the unemployment rate ticked up to 10.1 percent, from 10 percent.
Still, some economists expect the report will show that employers added as many as 50,000 jobs. That would end 23 straight months of net job losses but is unlikely to be enough to lower the unemployment rate.
If more employers do start hiring soon, that trend is expected to draw many of the jobless back into the labor force, which would push up the unemployment rate. Unemployed workers who give up on their job hunts aren't counted in the official jobless rate.