Outlook for 2013 Improves as U.S. Manufacturing Climbs

Manufacturing picked up in December, reflecting growth in orders, employment and exports that indicate the U.S. expansion will be sustained in 2013 following the budget deal.

The Institute for Supply Management’s manufacturing index climbed to 50.7 from a three-year low of 49.5 in November, the Tempe, Arizona-based group reported today. Fifty is the dividing line between expansion and contraction. Other data showed fewer outlays for non-residential projects pushed down construction spending in November for the first time in eight months.

A rebound in housing and stabilization in global growth point to a pickup in sales that will boost companies such as General Electric Co. Stocks surged, sending the Standard & Poor’s 500 Index to its biggest rally in a year, as Congress passed a bill averting spending cuts and tax increases that threatened to push the world’s largest economy into a recession.

“We are starting the new year on at least a fairly firm note,” said Tim Quinlan, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who projected the ISM index would climb to 51. While some manufacturers have been holding back because of the budget debate, he said, “there is demand in this economy. As soon as businesses are able to take advantage of this, we’ll see a bigger contribution from manufacturing to overall economic growth.”

The S&P 500 advanced 2.5 percent, the biggest gain since Dec. 20, 2011, to 1,462.42 at the close in New York. Commodities surged and Treasuries fell after Congress passed a bill preventing tax increases for more than 99 percent of households.

Construction Spending

Homebuilding outlays increased 0.4 percent in November to a $295.3 billion annual rate, the most in four years, a report from the Commerce Department showed today. The pickup failed to offset declines in non-residential building and public works as total construction spending fell 0.3 percent in November after a 0.7 percent gain.

The median forecast of 71 economists surveyed by Bloomberg called for the ISM index to rise to 50.5. Estimates ranged from 48 to 52. For all of last year, the factory gauge averaged 51.7, down from 55.2 in 2011 and 57.3 in 2010.

“We can take away a lot of positives from the December report,” Bradley Holcomb, chairman of the ISM factory survey, said on a conference call with reporters. The agreement to avoid the so-called fiscal cliff “is positive news” and “bodes well for manufacturing,” said Holcomb, who predicted the index will gradually climb to the mid-50 level over the next few months.

Growing Orders

The ISM’s report showed a fourth consecutive month of expanding orders in December, prompting the biggest advance in the supply managers’ employment index in more than three years. The group’s export gauge showed sales overseas grew for the first time in seven months.

Manufacturing in the U.K. unexpectedly expanded in December at the fastest pace in 15 months, according to a report today from Markit Economics and the Chartered Institute of Purchasing and Supply in London. In the euro area, manufacturing continued to shrink, Markit said.

China’s manufacturing unexpectedly expanded in December at the fastest pace in 19 months, boosting optimism that a recovery in the world’s second-biggest economy is gaining traction, according to a Dec. 31 report from HSBC Holdings Plc and Markit Economics.

“We see China getting better,” Jeffrey Immelt, chairman and chief executive officer at General Electric, said at a Dec. 17 investor meeting. “The U.S. consumer continues to be stronger and housing gets better, but there’s no doubt that the fiscal uncertainty slowed activity in the fourth quarter of the year. We think Europe and Japan will remain slow, but stable.”

12 Percent

Manufacturing, which accounts for about 12 percent of the U.S. economy, was at the forefront of the recovery that began in June 2009.

The automobile industry remains one source of growth. Cars and light trucks sold at a 15.5 million annual rate in November, the most since February 2008, boosted in part by buyers replacing cars damaged by superstorm Sandy, according to data from Ward’s Automotive Group.

An improving housing market also is helping manufacturers such as Illinois Tool Works Inc., a maker of welding equipment, construction supplies and auto parts.

“On the construction side, certainly we do expect housing starts to get better from where they’ve been,” Ronald Kropp, chief financial officer of the Glenview, Illinois-based company, said on a Dec. 14 conference call with analysts.

More Optimistic

American manufacturers are more optimistic about the outlook for sales and spending this year than service providers, signaling that factories will support the economic expansion after they slumped in recent months, according to a survey released Dec. 11 by the ISM group.

Purchasing managers at factories anticipate sales will grow 4.6 percent in 2013 and business investment will increase 7.6 percent, the report showed. By comparison, service providers estimate revenue will grow 4.3 percent this year and that capital spending will rise 7 percent, the ISM said.

Employers probably added jobs in December at about the same pace as the prior month, showing the labor market held up as lawmakers struggled to resolve the fiscal impasse, economists said before a report this week.

Payrolls rose by 150,000 workers after a 146,000 gain in November, according to the median forecast of 71 economists surveyed by Bloomberg ahead of Labor Department figures due Jan. 4. The unemployment rate may have held at 7.7 percent, the lowest since December 2008.

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