Factories in U.S. Probably Expanded on Capital Spending

Manufacturing in the U.S. probably expanded for a third month in February as the global economy stabilized and businesses invested more in new equipment, economists said before reports this week.

A reading of 52.5 is projected for the Institute for Supply Management’s factory index after a nine-month high of 53.1 in January, according to the median estimate of 64 economists surveyed by Bloomberg. A number greater than 50 shows growth in the industry that accounts for about 12 percent of the economy. Other data may show consumer spending and orders for durable goods excluding transportation equipment rose in January.

The healing in some overseas markets and the need for U.S. businesses to replenish their capital stock are helping underpin manufacturing, which stumbled in the second half of 2012. A pickup in factory production along with a rebounding housing market would help soften the blow to household incomes from the payroll tax increase, fueling spending and the economy.

“The global economy is modestly expanding, and it’s certainly in a better place than where it was,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. “Capital spending intentions are improving. You’ll also likely see some inventory acceleration in the current quarter. All of those things are going to be good for industrial production, which is good for the manufacturing sector.”

Federal Reserve Chairman Ben S. Bernanke will outline to Congress the central bank’s view of the economy’s progress when he gives his semi-annual monetary policy testimony on Feb. 26 and Feb. 27.

Fed Purchases

The Fed at its January meeting decided to keep buying $45 billion a month of Treasuries and $40 billion in mortgage debt without setting a limit on the duration or total size of the purchases. Officials affirmed their pledge to keep the target interest rate near zero to keep driving the economy. Speculation about scaled-back asset purchases by the Fed was fanned by the Feb. 20 release of minutes of the meeting.

The Tempe, Arizona-based ISM will release its manufacturing index on March 1. Estimates ranged from 50.5 to 55. The gauge averaged 50.8 in last year’s second half after averaging 52.6 in the first six months.

Commerce Department figures on Feb. 27 are projected to show orders for durable goods excluding transportation equipment such as commercial aircraft rose 0.2 percent in January after a 1 percent gain, according to the Bloomberg survey median.

Durable Goods

A decline in demand for airplanes probably led to a decrease in total durable goods orders, which dropped 4.6 percent during the month, the survey median shows, after a 4.3 percent surge. Boeing Co., contending with regulators’ safety concerns related to batteries on its 787 Dreamliner, reported orders for two aircraft in January, down from 183 in December and 124 a month earlier.

A global economy that is regaining its footing is providing support for American manufacturers. Goods exports climbed to a three-month high in December, Commerce Department figures showed Feb. 8. Domestic demand from U.S. companies is recovering, as well. Spending on equipment and software advanced at a 12.4 percent rate in the fourth quarter, the fastest in more than a year.

Applied Materials Inc., the largest producer of chipmaking equipment, forecast fiscal second-quarter sales that beat most estimates, indicating that some customers are expanding output on brisk demand for mobile devices. Sales in the current period will rise 15 percent to 25 percent from the prior quarter, the company said in a statement Feb. 13.

Strong Momentum

“Momentum in the business is strong,” Michael Splinter, the Santa Clara, California-based company’s chief executive officer, said at a conference the next day. The “display business is starting to come back. Orders are picking up there as well.”

Since the start of the fourth quarter, manufacturing shares have outpaced the broader market. The Standard & Poor’s Supercomposite Machinery Index has advanced 13.2 percent since Sept. 28, compared with a 5.2 percent gain in the S&P 500.

Strength in manufacturing would help nudge the economy as Americans deal with higher payroll taxes. While avoiding sweeping income-tax increases, a fiscal agreement by Congress on Jan. 1 let the payroll tax used to pay for Social Security benefits return to the 2010 level of 6.2 percent from 4.2 percent.

So far, the effect on household spending has been limited. Consumer purchases advanced 0.2 percent in January for a second month, according to the Bloomberg survey median before the Commerce Department’s report on March 1.

Fourth Quarter

While household spending picked up in the fourth quarter, it wasn’t enough to keep the economy from shrinking at a 0.1 percent annual rate, the Commerce Department’s first estimate of gross domestic product showed. The agency on Feb. 28 may revise its GDP estimate to show a 0.5 percent increase, as more recent figures showed a narrower trade deficit, more construction spending and a pickup in business investment.

A healthier housing market may help consumers feel more optimistic and wealthier. Economists project sales of new homes probably rose 3 percent in January to a 380,000 annual rate, according to the Bloomberg survey median. The Commerce Department will release the report on Feb. 26.

                        Bloomberg Survey

                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
Case Shiller Monthly MO   2/26      Dec.      0.6%      0.6%
Case Shiller Monthly YO   2/26      Dec.      5.5%      6.6%
Consumer Conf Index       2/26      Feb.      58.6      62.0
New Home Sales ,000’s     2/26      Jan.      369       380
New Home Sales MOM%       2/26      Jan.     -7.3%      3.0%
Durables Orders MOM%      2/27      Jan.      4.3%     -4.6%
Durables Ex-Trans MOM%    2/27      Jan.      1.0%      0.2%
GDP Annual QOQ%           2/28      4Q S     -0.1%      0.5%
Personal Consump. QOQ%    2/28      4Q S      2.2%      2.3%
Pers Inc MOM%             3/1       Jan.      2.6%     -2.4%
Pers Spend MOM%           3/1       Jan.      0.2%      0.2%
ISM Manu Index            3/1       Feb.      53.1      52.5
Construct Spending MOM%   3/1       Jan.      0.9%      0.4%
Vehicle Sales Mlns        3/1       Feb.      15.2      15.1
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