Manufacturing in U.S. Expands More Than Projected: Economy

Manufacturing expanded at a faster pace than projected in February, showing the U.S. economy is making headway in emerging from the harsh winter weather that has slowed growth in early 2014.

The Institute for Supply Management’s manufacturing index rose to 53.2 from 51.3 in January, the Tempe, Arizona-based group reported today. Readings above 50 signal expansion. Other figures showed consumer spending climbed more than projected in January as home-heating bills jumped and households began enrolling in the Obama administration’s health-care program.

The pickup in manufacturing would have been stronger if not for a slump in production caused by a shortage of parts, a sign orders will improve in coming months to replenish stockpiles. While households spent more on services such as utilities and health care in January, they cut back on goods, including autos, gasoline and clothing, underscoring the importance of bigger job and income gains needed to spur the biggest part of the economy.

“Manufacturing remains a bright spot for the economy,” said Russell Price, senior economist at Ameriprise Financial Inc. in Detroit and the best ISM index forecaster over the past two years, according to Bloomberg data. “There’s still a sizable amount of pent-up demand in the consumer and corporate sectors.”

Stocks slumped by the most in a month, joining a global selloff, as investors sought safer havens on concern Russia’s military presence in Ukraine could lead to a larger conflict. The Standard & Poor’s 500 Index sank 0.7 percent to 1,845.73 at the close in New York.

Global Manufacturing

Data on manufacturing across the globe have been mixed. In China, a pair of factory gauges declined in February. The purchasing managers’ index from HSBC Holdings Plc and Markit Economics dropped to a seven-month low, signaling contraction. A similar gauge from the Chinese government with a larger sample size was the weakest since June.

European manufacturing expanded more in February than previously estimated as a gauge in France rose to a five-month high. The index for the euro region unexpectedly rose to 53.2, compared with a prior reading of 53. The index was 54 in January, Markit Economics said today.

The median forecast of 81 economists surveyed by Bloomberg projected the U.S. ISM factory index would climb to 52.3. Estimates ranged from 49.5 to 55. Manufacturing accounts for about 12 percent of the economy. The ISM’s factory gauge averaged 53.9 for all of last year.

More Orders

The ISM’s orders gauge increased to 54.5 from 51.2, while a measure of orders waiting to be filled rose to 52 from 48. The pickup in demand and backlogs points to a rebound in production, which may have been hampered by inclement weather.

The group’s production index fell to 48.2, the weakest since May 2009, from 54.8. The 13.5-point slump in the gauge over the past two months was the biggest since September-October 2008, in the midst of the last recession.

There was “pretty broad-based optimism” about orders, Bradley Holcomb, chairman of the Institute for Supply Management’s factory survey, said on a conference call with reporters. Companies’ inability to get the parts they need probably slowed production, he said.

Another report today showed consumer spending climbed more than forecast in January as the biggest increase in outlays on services in over 15 years offset a drop in demand for durable and non-durable goods. Purchases, which account for almost 70 percent of the economy, rose 0.4 percent after a 0.1 percent gain the prior month that was smaller than previously estimated.

Services Spending

Adjusting the data for inflation, which generates the figures used to calculate gross domestic product, purchases rose 0.3 percent after decreasing 0.1 percent in December. Household outlays on services advanced 0.8 percent after adjusting for inflation, the biggest gain since June 1998.

Spending on electricity and natural gas jumped 11.3 percent, the biggest gain since December 2009. The Commerce Department also boosted outlays by $29 billion based on estimates of how much Medicaid benefits and enrollments in Affordable Care Act insurance exchanges increased.

“The ACA appears to be a one-time surge and utility spending will remain high as long as weather is adverse,” said Dean Maki, chief U.S. economist in New York for Barclays Plc. “It’s not a poor report but I wouldn’t be excited by the fact that we posted a solid gain because it does appear to be somewhat temporary.” Barclays raised its tracking estimate for first-quarter GDP to 2.2 percent from 1.8 percent based on the gain in consumer spending and construction.

Construction Spending

Another report from the Commerce Department showed outlays on construction projects unexpectedly climbed 0.1 percent in January following a 1.5 percent jump the prior month that was larger than previously estimated.

The Commerce Department’s consumer spending figures also showed the core price measure, which excludes food and fuel, rose 0.1 percent in January from the prior month and was up 1.1 percent from January 2013.

Retailers, coming off a tough holiday season marked by steep discounts, have been hard-hit as winter storms disrupted shopping in January. With results in from 62 of 122 retail chains, the industry has posted its first drop in quarterly profit since the economic contraction that ended in 2009, according to Retail Metrics Inc. Revenue also rose at the lowest rate since that year, the research firm found.

Businesses predicting a rebound include Target Corp., which said sales have shown signs of improvement in February, and Macy’s Inc., which anticipated that spring would bring a sales recovery after frigid weather forced hundreds of store closings.

Housing rebound

Home Depot Inc., the largest U.S. home-renovations chain, and Lowe’s Cos., the second-largest, expect continuing gains in demand spurred by the real-estate rebound.

“Some of the recent housing and jobs data has softened a little bit, but we still think the consumer is going to be there and 2014 is going to be a great year,” Robert Niblock, chief executive officer of Lowe’s, said in an interview last week.

Household purchases toward the end of last year were less robust than previously estimated, revised Commerce Department data issued on Feb. 28 showed. Consumer spending climbed at a 2.6 percent annualized pace in the final three months of 2013. Though slower than the prior estimate, it was still the best performance since early 2012. Fourth-quarter gross domestic product grew at a 2.4 percent rate, also weaker than the prior estimate.

Fiscal Restraint

Less fiscal restraint this year and further progress in the job market probably will boost GDP once the effect of unusually harsh weather dissipates.

Federal Reserve Chair Janet Yellen last week said the central bank is likely to keep trimming asset purchases, even as it monitors recent reports to “try to get a firmer handle on exactly how much of that set of soft data can be explained by weather and what portion, if any, is due to softer outlook.”

Policy makers anticipate that “economic activity and employment will expand at a moderate pace this year,” she said to the Senate Banking Committee on Feb. 27.

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