Business Activity in U.S. Unexpectedly Accelerates in Sign of Confidence

Business activity in the U.S. unexpectedly accelerated in September, a sign executives are betting the economy will weather recent slumps in stocks and confidence.

The Institute for Supply Management-Chicago Inc. said today its business barometer rose to 60.4 this month from 56.5 in August. A level of 50 is the dividing line between expansion and contraction. Economists forecast the gauge would drop to 55, according to the median estimate in a Bloomberg News survey.

Manufacturers such as Emerson Electric Co. (EMR) are counting on growing sales to China and other emerging countries to buffer them from slowing domestic demand. While announcing more unconventional measures to boost growth, the Federal Reserve last week said U.S. business investment continued to expand.

“There is still lingering support from exports and domestic demand but growth is slowing,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “These regional surveys can be very volatile. Some of it in recent months is the automotive rebound.”

Estimates for the Chicago index from the 57 economists surveyed ranged from 52 to 58.

Other reports today showed consumer spending slowed in August as incomes unexpectedly dropped for the first time in almost two years, while sentiment improved this month from an almost three-year low.

Spending Cools

Purchases rose 0.2 percent after a 0.7 percent increase the prior month, according to figures from the Commerce Department. A 0.2 percent advance in prices wiped out the gain in so-called nominal, or unadjusted, spending. Incomes decreased 0.1 percent, the first decline since October 2009.

The Thomson Reuters/University of Michigan final index of consumer sentiment climbed to 59.4 this month, higher than forecast, from 55.7 in August. The median estimate of economists surveyed by Bloomberg was 57.8, the same as the preliminary reading for September. The group’s measure of consumer expectations six months from now also rose.

Stocks trimmed losses following the reports from Chicago purchasers and sentiment. The Standard & Poor’s 500 Index fell 0.8 percent to 1,151.75 at 10:22 a.m. in New York after having been down as much as 1.7 percent earlier. Treasury securities rose, sending the yield on the benchmark 10-year note down to 1.94 percent from 2 percent late yesterday.

Orders Improve

The Chicago group’s production gauge increased to 63.9 from 57.8. The gauge of new orders climbed to 65.3, the highest level since April, from 56.9. The employment measure rose to 60.6, the highest since May, from 52.1 the prior month.

The measure of prices paid dropped to 62.3, a one-year low, from 68.6 and a gauge of inventories advanced to 60.3 from 52.9.

Economists watch the Chicago index and other regional manufacturing reports for an early reading on the national outlook. The Chicago group says its membership includes both manufacturers and service providers with operations in the U.S. and abroad, making the gauge a measure of overall growth.

The ISM’s national factory index fell in September to 50.3, the lowest level since July 2009, from 50.6 the prior month, according to the median projection in a Bloomberg survey ahead of the Oct. 3 report. Like the Chicago survey, a reading greater than 50 signals expansion.

Other Reports

Other regional surveys released this month showed factories have been scaling back. New York-region factories shrank for a fourth straight month in September and manufacturing in the Philadelphia area contracted for a third time in four months, figures from the Federal Reserve showed.

Even so, a Commerce Department report this week showed orders for capital goods like computers and communications gear climbed in August by the most in three months. Demand for all durable goods fell, the report said.

A weak dollar has made it cheaper for trading partners to buy American-made goods, even as mounting concern a European default may trigger a global slowdown has raised the risk export growth will cool. Lack of job growth in the U.S. and confidence at recession levels are weighing on consumer demand.

St. Louis-based Emerson Electric, which designs and manufactures electronic and electrical equipment and software, is forecasting robust sales to China that will help offset slower order growth at home as the economy weakens.

Overseas Demand

“I would expect us to have another good year in 2012, relative to China,” David Farr, chairman and chief executive officer of Emerson Electric, said on an Aug. 2 teleconference. “These are extremely uncertain and challenging times with the Japanese earthquake and tsunami, global material inflation, dysfunctional governments in the U.S. and Europeans not able to deal with the tough issues of debt and excess spending.”

Goodlettsville, Tennessee-based Dollar General Corp. (DG) is among retailers preparing for slower spending.

“The macroeconomic environment has remained difficult for consumers who continue to face high unemployment rates, high gasoline and high food costs,” said chief executive officer Richard Dreiling on an Aug. 30 teleconference.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net.

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