Factory Activity Grows, Hiring Outlook Brightens

Published February 1, 2011

WASHINGTON – The best month for U.S. factories in nearly seven years is brightening the outlook for job growth.

Companies are exporting more construction and mining equipment, and Americans are buying more cars, appliances and computers.

The Institute for Supply Management, a private trade group, said Tuesday that its index of manufacturing activity rose last month to 60.8. It was the highest reading since May 2004 and the 18th straight month the sector has grown. Any reading above 50 indicates expansion.

The strong data on manufacturing activity was a major reason the Dow Jones industrial average close above 12,000 for the first time since June 2008. Investors overlooked a separate report that showed builders spent less on projects in December and that the construction industry had hit a decade low.

Construction typically helps drive economic recoveries after a recession. But this time around, factories are more likely to crank out jobs.

Manufacturers added 136,000 jobs in 2010, the first annual net gain since 1997. And the trade group's employment index last month rose to its highest level since 1973.

Still, the sector lost almost 2.2 million jobs in 2008 and 2009. And manufacturers have managed to boost output in recent years by making their operations more efficient and getting more work out of the employees they already have.

Brian Bethune, an economist at IHS Global Insight, said he expects manufacturers will likely add about 10,000 to 15,000 jobs a month for the first few months this year. The January jobs report will be released Friday.

One reason that hiring expectations are rising is that new orders, export orders, and order backlogs all rose in January. That suggests U.S. factories will continue to increase output in the coming months.

"These companies have been running lean and mean, and now they've got an orders backlog," Bethune said. That's likely to push them add some workers, he said.

Manufacturing employs twice as many people as construction, which has struggled since the housing market went bust in 2006.

Construction spending fell to $814 billion last year, the Commerce Department reported. That's the lowest level in a decade and nearly half of what some economists consider to be a healthy amount. Economists say it could take until the middle of the decade to reach that point again.

Foreclosures are piling up and home prices in nearly every major U.S. city are still falling.

Spending on public projects is declining, mostly because state and local governments are grappling with budget crises and federal stimulus dollars are fading. Between November and December, federal construction dollars plunged 11.6 percent.

Rising vacancy rates and declining rents are dragging on the commercial real estate market.

"If manufacturing is the best performing sector, construction remains the worst," said Paul Ashworth, an economist at Capital Economics.

Manufacturing companies are likely benefiting from a cut in Social Security taxes that may boost consumer spending, and a tax break for companies that purchase new machinery and other big-ticket items, analysts said. Both tax breaks took effect last month.

Consumers are spending more on autos, appliances and other goods, while businesses have invested in more industrial machinery and computers. Those trends boosted economic growth to a 3.2 percent pace in the October-December quarter, the Commerce Department said last week.

Auto sales rose at a healthy clip in January. General Motors Co. and Chrysler said their sales soared 23 percent, while Ford Motor Co. reported a gain of 9 percent.

That's also a boon to thousands of smaller manufacturers that supply the auto industry, such as Advanced Secondaries, Inc., a small manufacturing firm in Cleveland.

The company, which employs 12 people, does drilling and other work on nuts, bolts and other fasteners. About 70 percent of its business is with the automotive sector.

Business began picking up in July and owner Don Nicholson says sales have doubled in the past year. He plans to hire three more workers over the next few months.

U.S. factories are also benefiting from rising overseas sales. The index of export orders jumped to 62 in January, from 54.5 the previous month. That matches a recent peak reached in May and is otherwise the highest level for that index since December 1988.

And the prices paid index, which measures whether manufacturing companies are paying more for raw materials, jumped sharply. That's a sign that inflation could pick up soon. If manufacturers are unable to pass on the higher costs, it could cut into their profit margins.

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AP Economics Writer Martin Crutsinger contributed to this report.

Written by CHRISTOPHER S. RUGABER and DEREK KRAVITZ, AP Business Writers

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