Businesses in the U.S. unexpectedly grew in February at the fastest pace in two decades, indicating manufacturing remains at the forefront of the recovery.
The Institute for Supply Management-Chicago Inc. said today its business barometer rose to 71.2 this month, the highest level since July 1988, from 68.8 in January. Figures greater than 50 signal expansion. The gauge, which was projected to fall, exceeded every estimate of economists surveyed by Bloomberg News.
Manufacturers like Deere & Co. are raising profit forecasts as business investment in new equipment accelerates and exports climb as the global economy recovers. A slowdown in purchases by U.S. households indicates consumers are taking a breather this quarter, a sign the expansion will become more dependent on gains in factory production.
“Given where inventory ratios are right now, manufacturing has at least several more months of very rapid growth in front of it,” said Robert Stein, a senior economist at First Trust Portfolios in Wheaton, Illinois, who forecast the gauge would rise to 70.3. Businesses “are just going to see a lot of demand for the kind of stuff you put on shelves.”
Other reports showed consumer spending rose less than forecast in January as increasing food and fuel prices caused Americans to cut back on other goods and services, and fewer Americans signed contracts to buy previously owned houses.
Household purchases increased 0.2 percent, the smallest gain since June and half the median forecast of economists surveyed by Bloomberg News, Commerce Department figures showed today in Washington. Incomes climbed more than projected, reflecting the tax-cut compromise reached by President Barack Obama and Congressional Republicans in December, and inflation remained below the Federal Reserve’s long-term forecast.
The index of pending home resales fell 2.8 percent after a revised 3.2 percent decrease the prior month that was initially reported as a gain, figures from the National Association of Realtors showed today in Washington. The median estimate in a Bloomberg News survey of economists called for a 2.3 percent drop.
The median estimates of 52 economists surveyed for the Chicago purchasers’ index projected a drop to 67.5. Forecasts ranged from 60 to 70.9.
The Chicago group’s production gauge rose to 78.2 from January’s reading of 73.7. The gauge of new orders climbed to 75.9 from 75.7. The employment measure fell to 59.8 from 64.1 the prior month.
Factories boosted payrolls by 49,000 workers in January, the most since August 1998, according to Labor Department data.
The Fed Bank of New York on Feb. 15 said manufacturing expanded in that region this month, and the Philadelphia Fed said two days later that factories grew at the fastest rate in seven years.
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, making the gauge a measure of overall growth. Its members have operations across the U.S. and abroad.
The ISM’s monthly national factory index, due tomorrow, climbed 61 in February from 60.8 the prior month when factories expanded the most since 2004, according to the median projection in a Bloomberg News survey. A reading above 50 signals expansion.
Overseas demand for American goods is helping support manufacturers. Exports rose 1.8 percent in December to the highest level since July 2008, according to Commerce Department data released Feb. 11. For all of last year, exports increased 17 percent, the biggest one-year gain since 1988.
Deere, the world’s largest farm-equipment maker, this month raised its full-year profit forecast and reported first-quarter profit that beat analysts’ estimates as higher crop prices boosted North American sales of tractors and combines.
Net income will be about $2.5 billion in the year ending Oct. 31, more than the $2.1 billion forecast in November, the Moline, Illinois-based company said Feb. 16 in a statement. Equipment sales will rise 18 to 20 percent in fiscal 2011, equivalent to $27.8 billion to $28.3 billion.
Agricultural and turf equipment sales will rise 16 percent in fiscal 2011 as tight stocks of a variety of crops boost prices, Deere said. Farm-machinery sales in the U.S. and Canada are forecast to gain about 5 percent while Europe will increase 10 percent and South America will be comparable to 2010.