Manufacturers Shake Off Effect of Budget Impasse: Economy

Manufacturing unexpectedly picked up in October as American companies shook off the impact of the federal government shutdown.

The Institute for Supply Management’s index rose to 56.4, the highest since April 2011, from 56.2 a month earlier, the Tempe, Arizona-based group’s report showed today. Readings above 50 indicate growth. Economists in a Bloomberg survey called for a decline to 55.

Industries from textiles to transportation expanded as motor vehicle purchases and improving export markets underpinned manufacturing at the start of the fourth quarter. October sales gains at General Motors Co. and Ford Motor Co. (F) signal demand recovered after a 16-day partial closure of government agencies that held the economy back.

The shutdown “is unlikely to spill over and affect broader manufacturing activity,” said Michael Gapen, a senior U.S. economist in New York at Barclays Plc, who projected an ISM reading of 56. “There’s a potential for us to see a moderate strengthening in both domestic demand as well as some of the constraints on global growth may have eased a bit.”

Stocks rose, halting the first two-day drop in the Standard & Poor’s 500 Index in three weeks, as optimism about corporate earnings offset concern that improving economic data could prompt the Federal Reserve to trim stimulus. The Standard & Poor’s 500 Index climbed 0.3 percent to 1,761.64 at the close in New York.

From China to South Korea, manufacturing strengthened last month in a sign that growth risks are abating in Asia and expansion may pick up this quarter.

Chinese Manufacturing

China’s official factory index of purchasing managers rose to an 18-month high and a measure from HSBC Holdings Plc and Markit Economics topped projections. HSBC’s reading for South Korea showed growth for the first time since May and Taiwan’s PMI gained. An Australian index also advanced.

In the U.K., manufacturing eased in October from a month earlier. A measure for Norway showed a pickup in growth, while Switzerland, Sweden and Denmark showed slower expansions.

Estimates for the U.S. factory index from 83 economists in the Bloomberg survey ranged from 52.5 to 57.5. Manufacturing accounts for about 12 percent of the economy. Of the 18 industries covered, 14 reported expansion in October, the ISM said.

While the partial shutdown of federal agencies last month failed to slow manufacturing, less government spending prompted economists to cut their fourth-quarter growth forecasts, according to a survey yesterday.

Fourth Quarter

The world’s largest economy will expand at a 2 percent annualized rate in the final three months of 2013, less than the 2.4 percent pace projected in an Oct. 4-9 survey of economists.

Sales of cars and light trucks rose 16 percent in the year ended last month at GM and 14 percent at Ford, while Chrysler Group LLC reported an 11 percent gain. The results compared with analysts’ average estimates for increases of 7.9 percent for GM, 16 percent for Ford and 14 percent for Chrysler in a Bloomberg survey. Vehicles sold at a 15.2 million annualized rate in October, the same as a month earlier, according to data from Ward’s Automotive Group.

“What we saw early in the month was some softness, but we were very encouraged when we saw the retail demand in the industry bounce back,” John Felice, Ford’s vice president of U.S. marketing, sales and service, said on a conference call.

New Orders

The ISM’s gauge of U.S. new orders, which was little changed in October, has exceeded 60 for three straight months, the longest such stretch since the start of 2011.

Supplier delivery times also lengthened, showing factories had some difficulty keeping pace with demand, according to an ISM measure that climbed to the highest level since June 2011. A gauge of unfilled orders also increased. At the same time, measures of production and employment cooled.

The report also showed gauges of factory inventories and customer stockpiles rose in October from the prior month.

Improving economies in some parts of the world are benefiting companies such as Kennametal Inc. (KMT), which produces tools and tooling systems.

“In the U.S., there have been various concerns about the economy as well as the fiscal budget issues and tax increases as well as the federal spending sequester,” Carlos Cardoso, chairman and chief executive officer at Latrobe, Pennsylvania-based Kennametal, said on an Oct. 24 earnings call. “Business conditions continue to be tentative” even as “the foundation of a recovery remains strong.”

To contact the reporter on this story: Michelle Jamrisko in Washington at mjamrisko@bloomberg.net

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

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