American Factories Expand at Fastest Pace in Three Years

Manufacturing expanded in July at the fastest pace in more than three years, showing U.S. factories will help power the economy after a second-quarter rebound.

The Institute for Supply Management’s index increased to 57.1, the highest since April 2011, from 55.3 a month earlier, the Tempe, Arizona-based group’s report showed today. Readings above 50 indicate growth. The median forecast in a Bloomberg survey of economists was 56.

Orders and production expanded last month at the fastest pace of the year as factories responded to increased purchases of automobiles and business equipment. Stronger job and income growth will provide the wherewithal for a pickup in household demand, underpinning manufacturing.

“Manufacturing’s growing pretty solidly,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, said before the report. “The backdrop for consumer spending looks positive with the labor market improving. Capital goods orders have strengthened. And the housing recovery, while it’s been choppy, does seem to be getting back on track.”

Estimates for the factory index from 78 economists in the Bloomberg survey ranged from 54.7 to 57.5.

The ISM’s gauge of new orders climbed to 63.4 last month after 58.9 in June.

An index of production rose to 61.2 from 60 the prior month. The group’s factory employment measure jumped in July to 58.2, the highest since June 2011, from 52.8, while the index of orders waiting to be filled increased to 49.5 from 48.

The report also showed gauges of factory inventories contracted in July and customer stockpiles shrank at a faster pace from a month earlier.

Second Quarter

The figures follow a report this week that showed the economy expanded at a 4 percent annualized pace in the second quarter after shrinking 2.1 percent in the first three months of the year.

The increase in gross domestic product matched the average growth rate from July through December of 2013 that marked the strongest six months in a decade.

Purchases of durable goods, including autos, furniture and appliances, jumped at a 14 percent pace, the fastest since the third quarter of 2009. Automobiles remain a bright spot for consumer spending and for factory production. Cars and light trucks sold at a 16.9 million pace in June, the fastest rate since July 2006, figures from Ward’s Automotive Group showed.

Corporate investment rebounded as well from April through June. Business spending on equipment rose at a 7 percent rate after declining 1 percent in the first quarter.

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