Manufacturing in the U.S. expanded at the fastest pace in more than two years as orders and production jumped, indicating more factories were growing optimistic about the second half of the year.
The Institute for Supply Management’s factory index increased to 55.4, the strongest since June 2011 and exceeding the highest projection in a Bloomberg survey of economists, after 50.9 in the prior month, the Tempe, Arizona-based group’s report showed today. Readings above 50 indicate expansion, and the median forecast of 84 economists surveyed by Bloomberg called for an advance to 52.
Sustained demand for automobiles and for materials tied to the recovery in housing are keeping assembly lines busy even as global markets struggle to improve. Manufacturing, which accounts for about 12% of the economy, may also find relief in the second half of the year as the headwinds associated with cuts in the federal budget and higher income taxes dissipate.
“Fiscal drag was quite sizeable in the first half of the year, and that drag is starting to fade a little bit,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, said before the report. “Consumer demand should be picking up, and the backdrop here is the still improving labor market.”
Stocks extended gains after the figures, with the Standard & Poor’s 500 Index climbing 1.1% to 1,704.32 at 10:16 a.m. in New York.
Federal Reserve policy makers said yesterday at the conclusion of their two-day meeting that “economic growth will pick up from its recent pace and the unemployment rate will gradually decline.” The Federal Open Market Committee also said it will maintain its $85 billion in monthly bond purchases aimed at stoking the expansion and boosting employment.
Economists’ estimates in the Bloomberg survey ranged from 49.6 to 53.5. The gauge has averaged 52.7 since 1948.
The ISM’s new orders measure jumped to 58.3 last month, the highest since April 2011, from 51.9 in June. The index of production surged to 65, the strongest reading since May 2004, from 53.4 in June.
The index of factory employment increased to 54.4, the highest since June 2012, from 48.7 in June.
A gauge of factory inventories fell to a three-month low of 47 from 50.5, while a gauge of customer stockpiles rose to 47.5 from 45. Figures less than 50 means manufacturers are paring stockpiles.
The measure of orders waiting to be filled fell to 45 from 46.5.
Elsewhere, manufacturing is showing signs of stabilizing. U.K. manufacturing growth accelerated more than economists forecast in July, adding to evidence Britain’s recovery is gathering pace and strengthening the case for the Bank of England to keep stimulus paused.
A factory gauge rose to 54.6 in July from 52.9 in June, the highest in 28 months, Markit Economics and the Chartered Institute of Purchasing and Supply said today in London. That’s above the 50 level indicating expansion. That momentum was echoed in the euro area, where survey manufacturing grew more than initially estimated, while China’s official factory index also showed expansion.
Manufacturing is finding support from the housing market as sales of new homes rose to the highest level in five years in June. The housing recovery has spurred demand for the appliances and furniture needed to fill them, giving companies such as Armstrong World Industries Inc. a reason to start their own construction.
The Lancaster, Pennsylvania-based manufacturer of flooring, ceiling and cabinets is planning to build a $40 million North American plant later this year to produce luxury vinyl tile.
“Given current and projected volumes, manufacturing in the U.S. is now a financially attractive option,” Matthew Espe, Armstrong’s chief executive officer, said in a July 29 conference call. “Local production and the elimination of freight and duty expense will drive lower cost, reduce inventories and provide better customer service and lead times. This is an exciting product category for us and an appealing investment in financial terms as well.”
The report corroborates regional surveys that showed manufacturing in the New York and Philadelphia regions expanded more than forecast in July.
Another gauge of manufacturing yesterday also indicated sustained growth. The MNI Chicago Report’s business barometer increased to 52.3 from 51.6 in June. A reading above 50 signals expansion.