Manufacturing Index for U.S. Increased in August

Manufacturing in the U.S. expanded at a faster pace than forecast in August as factories added workers and cranked up production.

The Institute for Supply Management’s factory index rose to a three-month high of 56.3 from 55.5 in July, the Tempe, Arizona-based group said today. Readings greater than 50 signal growth, and the figure was projected to drop to 52.8, according to the median forecast in a Bloomberg News survey.

Stocks rallied as U.S. and China manufacturing figures tempered concern the global economic recovery will wane without more government stimulus. Production gains may partially compensate for a slowdown in consumer spending and sluggish housing market that are causing the world’s largest economy to cool in the second half of the year.

Manufacturing is “one of the bright spots,” said Hugh Johnson, chief investment officer at Hugh Johnson Advisors LLC in Albany, New York, the only analyst surveyed to predict the index would rise. Still, “you have to have increased demand from consumers and businesses for these numbers to be sustained.”

The Standard & Poor’s 500 Index increased 3 percent to 1,080.29 at the 4 p.m. close in New York, the biggest gain since July 7. The yield on the 10-year Treasury note rose to 2.57 percent from 2.47 percent late yesterday.

China’s purchasing managers’ index rose to 51.7 last month from 51.2, a government-backed report showed. A separate measure released by HSBC Holdings Plc and Markit Economics also increased.

U.S. manufacturers are benefiting from growth overseas. Caterpillar Inc., the Peoria, Illinois-based maker of construction and mining equipment, may add as many as 9,000 workers worldwide this year, Chief Executive Officer Doug Oberhelman said at a meeting with analysts Aug. 19.

Housing Weakens

While factories are helping extend the recovery, the housing slump keeps taking a toll on the economy. Construction spending in July fell twice as much as forecast, led by a slump in homebuilding that will depress growth, Commerce Department figures showed today.

The 1 percent drop brought spending to $805.2 billion, the lowest level in a decade, after a revised 0.8 percent decrease in June that wiped out a previously estimated gain.

President Barack Obama said yesterday reviving economic growth was his “central mission” after declaring the U.S. combat mission in Iraq over. The president, in a nationally televised speech, underscored that he’s focused on the economy at a time when voters are increasingly skeptical of his policies and congressional elections are a little more than two months away.

ADP Employment

Another report today raised concern about employment. Companies in the U.S. unexpectedly cut employment in August, data from a private report based on payrolls showed. Employment fell by 10,000, according to figures from ADP Employer Services.

Manufacturing, which accounts for about 11 percent of the economy, spearheaded the recovery from the worst recession since the 1930s as rising export demand led companies to ramp up spending on equipment and to replenish stockpiles. Estimates in the Bloomberg survey of 78 economists before the U.S. figures ranged from 49.9 to 56.

The group’s production index increased last month for the first time since April, while the employment gauge rose to the highest since December 1983.

Production may start to cool as the report showed a gauge of bookings fell in August to the lowest level since June 2009, while backlogs eased.

A gauge of factories’ inventories showed stockpiles increased for a second straight month.

Federal Reserve

Federal Reserve Chairman Ben S. Bernanke last week said the central bank “will do all that it can” to ensure a continuation of the economic recovery, and outlined steps it might take if growth slows.

“Investment in equipment and software will almost certainly increase more slowly over the remainder of this year, though it should continue to advance at a solid pace,” Bernanke said.

Intel Corp., the world’s biggest chipmaker, last week cut its third-quarter revenue projection, citing weaker-than- expected consumer demand for personal computers in mature markets as the reason for the adjustment.

Cisco Systems Inc., the world’s largest maker of networking equipment, in August forecast first-quarter sales that missed analysts’ estimates. Chief Executive Officer John Chambers said the San Jose, California-based company was seeing “unusual uncertainty” and getting “mixed signals” about the health of the economy.

Cuts in Forecast

Economists at BofA Merrill Lynch Global Research in New York today cut U.S. growth forecasts for the rest of this year and next. The world’s largest economy will expand at an average 1.65 percent annual pace from July through December and grow 1.8 percent in 2011, a half point less than previously estimated.

“ The two most important monthly indicators -- private payrolls and core retail sales -- have stalled,” the economists headed by Ethan Harris wrote in a note to clients. “At the same time, the post-tax-credit housing hangover has been worse than expected, and even the business equipment recovery shows signs of faltering. Our sense is that the growth recession is already here and it is likely to linger through the first half of next year.”

To contact the reporter on this story: Courtney Schlisserman at cschlisserma@bloomberg.net

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