Business Activity in U.S. Unexpectedly Accelerated

Business activity in the U.S. unexpectedly accelerated in November as orders climbed, signaling the economic recovery will carry through into 2010.

The Institute for Supply Management-Chicago Inc. said today its barometer rose to 56.1, the highest level since August 2008, from 54.2 the prior month. Readings above 50 signal expansion. Milwaukee and Texas also showed gains in manufacturing, other reports showed.

Rising sales, spurred in part by government incentives, and growing demand from abroad have led to a drawdown in inventories that will boost production and sustain the recovery. Mounting job losses raise the risk spending will retrench, one reason why Federal Reserve policy makers have pledged to keep borrowing costs low “for an extended period.”

“There is definitely room for production to be coming back,” said David Semmens, an economist at Standard Chartered Bank in New York, who forecast the index would rise. “There will be some export-led growth.”

Stocks rose, extending a monthly gain for the Standard & Poor’s 500 Index as concern eased over a possible default by Dubai World. The S&P 500 climbed 0.4 percent to close at 1,095.63. The gauge rose 5.7 percent in November.

Economists projected the Chicago index would drop to 53, based on the median estimate of 53 projections in a Bloomberg News survey. Forecasts ranged from 50 to 57.

More Orders

The Chicago purchasers’ new orders gauge climbed to 62.8, the highest level since May 2007, from 61.4 the previous month.

“The ongoing strength in that measure, a leading indicator of activity, bodes well for production gains going forward,” Michelle Girard, a senior economist at RBS Securities Inc. in Stamford, Connecticut, said in a note to clients.

An increase in bookings also propelled other regional measures this month. The National Association of Purchasing Management-Milwaukee said its factory gauge climbed to 57 from 50 in October. Manufacturing activity in Texas expanded in November for the first time in two years, according to a report from the Fed Bank of Dallas.

The figures underscore gains in earlier reports. The Fed Bank of New York’s Empire State Index showed manufacturing in its district expanded in November for a fourth month, while the Philadelphia Fed’s gauge climbed to the highest level in more than two years.

Production, Employment

Today’s report showed the Chicago group’s production index fell to 57.6 from a one-year high of 63.9 in October. The employment index improved to 41.9 from 38.3, the report showed.

A measure of prices paid for raw materials increased to 52.6 from the prior month’s 48.6, while a gauge of inventories rose to 34.9 from 32.2.

Economists watch the Chicago index for an early reading on the outlook for overall U.S. manufacturing, which makes up about 12 percent of the economy.

The Tempe, Arizona-based Institute for Supply Management group’s nationwide manufacturing index probably fell this month to 54.8 from a three-year high of 55.7 in October, according to the Bloomberg survey median. Those figures are due tomorrow.

The world’s largest economy expanded at a 2.8 percent pace from July through September after a yearlong contraction that was the worst since the 1930s, figures from the Commerce Department showed last week.

Auto Production

Automotive companies have been at the forefront of increases in manufacturing. General Motors Co. and Ford Motor Co. had their first combined sales gain in three years in October, helping the industry rebound from a drop in demand after the “cash for clunkers” program expired.

Sales climbed 4.1 percent from a year earlier at GM, its first monthly gain since January 2008, and 3.1 percent at Ford, the companies said Nov. 3.

“Clearly, we’re seeing improvement in the economy and in the industry,” Michael DiGiovanni, GM’s sales analyst, said on a conference call.

Many companies are counting on government stimulus to help boost profits. Eaton Corp. may win $1 billion in orders in 2010 and 2011 from stimulus spending to spur construction of schools and renovation of military bases, said the top executive of the Cleveland-based maker of circuit breakers and fuel pumps.

“We will benefit from a lot of these building projects,” Chief Executive Officer Sandy Cutler said last month in an interview. “These infrastructure-related programs always take longer to get out and get going. The time the economy is going to be recovering in 2010 is when a lot of these opportunities will actually be adding up.”

By Bob Willis
Bloomberg