Orders for machinery climbed 15.6% in January, led by a 57.3% gain in construction gear that was the biggest since September 2011.
Factory inventories increased 0.5% in January, and manufacturers had enough goods on hand to last 1.28 months at the current sales pace, compared with 1.27 months in December.
Along with sequestration, on Jan. 1, Congress allowed the payroll tax that funds Social Security to rise to 6.2% from 4.2 and allowed taxes on top income earners to rise. While retail sales have not yet declined in the wake of the higher levies, future weakness could limit gains in manufacturing.
Demand from businesses, nonetheless, looks to be holding up. Business investment was a bright spot last quarter as spending on equipment and software grew at an 11.3% rate, the fastest in more than a year. Depleted inventories may also signal a first-quarter pickup in production.
American factories expanded in February at the fastest pace in almost two years, according to the Institute for Supply Management’s factory index. The gauge rose to 54.2, the highest reading since June 2011, the Tempe, Arizona-based group said March 1. Readings greater than 50 signal expansion.
“From where we sit today, we feel like most of the excess inventory has been worked out,” Craig Arnold, chief operating officer of industrial equipment maker Eaton Corp., said during a March 1 analyst conference. “Our underlying demand is matching retail sales. We’re optimistic that at this point to the extent that we see real underlying demand in the market that we once again see a multiple of that as it impacts our businesses.”
To ensure the expansion maintains traction, Federal Reserve policy makers have pursued unprecedented monetary easing. Fed Chairman Ben S. Bernanke last month, testifying before the Senate Banking Committee, defended the Fed’s $85 billion a month in asset purchases and near-zero target interest rate, saying that “monetary policy is providing important support to the recovery.”
“Notably, keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods,” he said.