U.S. Manufacturing Grows at Fastest Pace in Three Years

Gains in manufacturing boosted the U.S. expansion in August, led by a surge in orders for plastics and metals that powered the world’s largest economy past a global slowdown.

The Institute for Supply Management’s index unexpectedly climbed to 59, the highest level since March 2011, from July’s 57.1, beating all forecasts in a Bloomberg survey of economists. The orders gauge was the strongest in a decade, the Tempe, Arizona-based group reported today.

American factories are benefiting from a rebound in auto sales and stronger business spending on new plants and equipment that are helping industries rise above the political tensions weighing on Europe. Faster wage growth is now needed to sustain the advance and broaden household purchases beyond automobiles.

“The manufacturing sector is just on fire right now,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, whose ISM forecast at 58.5 was the highest in the Bloomberg survey. “You’ve got increased demand for workers, and the more people working, and the more money they are making, the more money they’ll spend.”

Stocks fell, after the Standard & Poor’s 500 Index had its best month since February, as energy producers sank with the price of crude. The S&P 500 dropped 0.1 percent to 2,002.28 at the close in New York.

Manufacturing Overseas

The news on manufacturing was less positive overseas. U.K. factory growth slowed more than forecast last month and Italian manufacturing shrank as Europe suffered the fallout from weakening demand and mounting geopolitical risks in Ukraine and the Middle East, other reports showed this week.

“We’ve been dealing with the fragile European recovery for years now, and we seem to be moving right through it,” Bradley Holcomb, the ISM survey chairman, said in an interview. There’s a chance the U.S. won’t see a “discernible impact,” though if things escalate, that could change, he said.

The median forecast in a Bloomberg survey of 78 economists was 57 for the U.S. ISM index. Estimates ranged from 55 to 58.5. Readings greater than 50 indicate growth.

Seventeen of 18 industries surveyed by the purchasing managers’ group grew last month, led by plastics, furniture and metals.

‘Broad-Based’ Gain

The gain in manufacturing was “so broad-based,” ISM’s Holcomb said on a conference call with reporters. There is not one particular driver, “it’s just sort of a continuation of the trend that we’ve had since January.”

Another report today signaled some of the boost is probably coming from the building industry. Spending on construction projects increased 1.8 percent in July, the most since May 2012, led in part by increased work on factories and power facilities. The value of privately funded spending on non-residential projects reached a five-year high.

The increase in the ISM index came as the group’s new orders gauge climbed to 66.7, the highest since April 2004, and its measure of orders waiting to be filled also advanced. The group’s production gauge rose to the strongest since May 2010.

The figures follow data last week that showed the economy expanded at a 4.2 percent annualized pace in the second quarter after shrinking 2.1 percent in the first three months of the year.

Consumer Spending

Consumer spending, which accounts for almost 70 percent of the economy, started the third quarter on soft footing. Purchases retreated in July for the first time in six months as wages failed to accelerate, a report last week showed. At the same time, a healing job market could provide momentum going forward: The economy has added more than 200,000 jobs for each of the six months through July.

People who are confident in their employment prospects may be more willing to take on big purchases such as automobiles. Cars and light trucks sold at a 16.4 million pace in July, a slowdown from 16.9 million in June that was the fastest rate since mid-2006, figures from Ward’s Automotive Group show.

Gains in business investment may help make up for some of the shortfall among households. New orders for durable goods soared 22.6 percent in July after a revised 2.7 percent gain in June that was bigger than previously estimated, according to Commerce Department data issued last week.

Though the surge was driven by demand for aircraft, bookings for motor vehicles and parts also climbed. Revised data for June reflected improving demand for a broad array of items, including computers, electrical equipment and machinery.

Computer Sales

Hewlett-Packard Co. last month reported fiscal third-quarter sales that topped analysts’ estimates, fueled by improving personal-computer sales.

Corporate spending on PCs has also helped lift the results of other technology companies recently. Intel Corp. in July forecast revenue that exceeded analysts’ estimates for the current quarter, while Microsoft Corp. said it’s seeing signs of improvement in the PC market.

“We continue to see customers looking to refresh their aging” computers, Meg Whitman, chief executive officer of Palo Alto, California-based Hewlett-Packard, said on an Aug. 20 earnings call. “We believe we can continue to gain share in PCs, despite the challenges in this market as it consolidates.”

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