US Manufacturing Sector Sees Significant Recovery In 2010

Manufacturing activity continued to improve, as the Purchasing Managers Index rose slightly from November 2010 to December 2010, and new orders and production saw their steepest increase in …

Manufacturing activity continued to improve, as the Purchasing Managers Index rose slightly from November 2010 to December 2010, and new orders and production saw their steepest increase in December. Recovery in the manufacturing sector focused on the auto, metals, food, electronics and machinery industries; at the same time, those manufacturing sectors related to housing continued to struggle and the employment index declined. See the following article from The Street for more on this.

Manufacturing activity in the U.S. expanded in December, led by strength in new orders and production, according to the Institute for Supply Management’s Manufacturing Report on Business.

The Purchasing Managers’ Index, or PMI, rose to 57% from 56.3% in November. That was in line with estimates. Economists expected the index to rise to 57.3%. A reading over 50 indicates expansion. The index is based on a survey of purchasing and supply managers nationwide.

“We saw significant recovery for much of the U.S. manufacturing sector in 2010,” Norbert Ore, chair of the survey committee noted. “The recovery centered on strength in autos, metals, food, machinery, computers and electronics, while those industries tied primarily to housing continue to struggle. Additionally, manufacturers that export have benefited from both global demand and the weaker dollar. December’s strong readings in new orders and production, combined with positive comments from the panel, should create momentum as we go into the first quarter of 2011.”

Manufacturing tends to lead the economy into and out of recessions and remains a key indicator of economic activity. Industrials performed well in 2010, as strong demand from China and other emerging markets helped companies such as Caterpillar(CAT_) and Deere(DE_).

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New orders and production showed the steepest increase in December. The ISM New Orders Index jumped 4.3 percentage points to 60.9% in December. The Production Index rose 5.7 percentage points to 60.7%. Backlog of orders also improved 1 percentage point to 47 %. A healthy backlog is necessary for a more sustainable growth in manufacturing.

Inventories and supplier deliveries grew at a slower pace. A sore point in the report was the drop in the employment index to 55.7%. The prices index also rose 3 percentage points to 72.5%, raising concerns of inflation.

Exports index slowed 2.5 percentage points in December. The dollar has been strengthening in recent months on concerns about the euro zone debt crisis.

The SPDR Industrials ETF(XLI_) was up 1% on Monday morning.

Manufacturing activity in Europe also picked up, led by strong export performance in Germany. The gauge of manufacturing activity rose to 57.1 from 55.3.

Data over the weekend showed manufacturing activity in China slowed for the first time in five months, encouraging hopes that the country’s central bank may not raise rates to cool its overheating economy.

Separately, the Commerce Department reported a 0.4% increase in U.S. construction spending to $810.2 billion from a revised $806 billion in October. Economists were expecting spending to rise 0.2%.

The SPDR Homebuilders ETF(XHB_) was rising 1.7% to $17.69 in Monday morning trading.

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