U.S. ECONOMY

Factory index has strong '04 finish

However, construction spending dropped.


Published: Tuesday, January 4, 2005 at 6:01 a.m.
Last Modified: Monday, January 3, 2005 at 10:52 p.m.
NEW YORK - The nation's industrial sector ended 2004 on a high note, with manufacturing activity expanding in December for the 19th consecutive month, a research group reported. But the government said construction spending dropped in November as builders reined in projects in anticipation of higher interest rates.
The Institute for Supply Management said that its main index of industrial activity rose to 58.6 in December from 57.8 in November. The December performance was slightly more robust than analysts had anticipated.
A reading of 50 or above in the index means the manufacturing sector is expanding, while a figure below 50 represents a contraction. The index has been 50 or above since May of 2003.
Norbert J. Ore, chairman of the institute's survey committee, said the December results were "driven by a significant increase in the new orders index."
He added that the strong finish for 2004 meant that manufacturing had "significant momentum going into the first quarter of 2005."
Separately, the Commerce Department reported that construction spending declined 0.4 percent in November, the first drop in 10 months, as private builders cut back on residential and commercial projects.
Analysts had forecast a 0.5 percent rise in construction spending.
Still, even with the drop, the level of spending - $1.01 trillion on an annualized basis - was quite healthy. And, construction activity in October turned out to be significantly stronger than initially thought. Revised figures showed that spending in October rose by 0.3 percent, compared with the initially reported flat reading.
The drop in construction spending disappointed investors. In early afternoon trading, the Dow Jones industrial average was down 5.47 at 10,777.54.
Broader stock indicators were also down slightly. The Standard & Poor's 500 index was off 4.69 at 1,207.23, while the Nasdaq composite index was down 16.02 at 2,159.42.
Dan Laufenberg, chief U.S. economist at American Express Financial Advisors in Minneapolis, said the construction spending data was disappointing but not unexpected.
"In a rising rate environment, one would expect that construction would not do well," Laufenberg said. "What you're likely to see is some leveling off of construction activity, which is consistent with the November data."
Most analysts believe home sales will moderate in 2005, in large part on the expectation that mortgage rates will move higher this year. The average rate on 30-year mortgages could climb to around 6.5 percent by the end of this year from 5.84 in 2004, analysts predict.
The manufacturing activity report from the Tempe, Ariz.-based institute is watched closely by the markets because it is the first published data on economic activity for the month of December.
The institute's price index eased a bit in December to a reading of 72 from 74 in the previous month. Ore said that "while there is continuing upward pressure on prices, the rate of increase is slowing and definitely trending in the right direction."
New orders increased to 67.4 in December from 61.5 in November, while new export orders expanded to 60 in December from 54.7 the month before.
Production eased a bit in December to a reading of 56.9 compared with 57 in November, and the employment index dropped to 52.7 in December from 57.6 in November.
Anthony Chan, managing director and senior economist at JPMorgan Fleming Asset Management in Columbus, Ohio, said the advance in new orders "is very, very encouraging because it suggests that the manufacturing sector's recovery remains alive and well."
He said that the drop in employment - which would generally be pushed up as orders increase - might reflect "a temporary jump in productivity" in manufacturing, which is not unusual at this point in the business cycle.
Chan said that the report overall "is telling me that the manufacturing sector, one of the most cyclical, is positive, which bodes well for the overall economy in 2005."
The report indicated growth in 14 of the 20 manufacturing categories tracked by the survey, including leather, computers, furniture, food, transportation and equipment, primary metals, chemicals, apparel and textiles.

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