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Manufacturing in U.S. Jumps to 20-Year High on Rising Orders, Index Shows Listen

Treasuries Drop After ISM Factory Index Surges to Highest Level Since 1983

Stocks in U.S. Decline, Led by Bank of America; S&P Gains for Sixth Week




U.S. Economy: December ISM Manufacturing Index Rises (Update3) Listen
Jan. 2 (Bloomberg) -- An index of U.S. manufacturing rose in December to the highest level in two decades as more companies placed orders than at anytime since 1950, prompting factories to raise production and hire.

``We are making everything we can make,'' said Thomas Usher, chief executive of U.S. Steel Corp., the biggest steel maker in North America, in a televised interview with Bloomberg News.

The Institute for Supply Management's factory index jumped to 66.2 last month, the highest since December 1983, from 62.8 in November. The increase was unexpected and marked the sixth month the index has exceeded 50, signaling expansion.

With sales rising in the fourth quarter, economists said production is likely to continue to grow, increasing the need for more workers. The industry group's employment index increased to the highest since December 1999, suggesting the economy may be about to end a 40-month hemorrhaging of factory jobs.

Manufacturers ``just cut so deep that they didn't have much choice to meet the level of activity,'' except through additional hiring, said Norbert Ore, chairman of the industry group and a purchasing manager for Atlanta-based Georgia-Pacific Corp.

The Labor Department's December employment report next Friday is forecast to show manufacturers didn't cut jobs for the first time since July 2000. Economists surveyed by Bloomberg News forecast no change in factory employment, according to the median estimate. Since President George W. Bush took office, the economy has lost 2.6 million factory positions.

Market Reaction

``Manufacturing has moved solidly into recovery mode, and it may only be a matter of weeks before manufacturing payrolls actually rise,'' said Drew Matus, an economist at Lehman Brothers Inc. in New York.

Economists had expected a reading of 61 in the factory index, based on the median of 55 forecasts in a Bloomberg News survey. The Tempe, Arizona-based, group surveys more than 400 companies in 20 industries, including clothing, printing, transportation, furniture and plastics. Manufacturing accounts for about one- seventh of the economy.

U.S. Treasury securities fell amid concern the economy's strength may prompt the Federal Reserve to raise interest rates by the middle of the year. The Treasury's benchmark 10-year note fell a full point, pushing up the yield 13 basis points to 4.38 percent at 3:30 p.m. New York time.

Federal Funds

Stocks fell, led by shares of financial companies and homebuilders, on concern interest rates will rise. The Dow Jones Industrial Average dropped 39 points, or 0.4 percent. The Standard & Poor's 500 Index fell 4 points, or 0.4 percent. Shares of Pulte Homes Inc., Centex Corp. and Wells Fargo & Co. declined.

The implied yield on the July federal funds futures contract rose 6.5 basis points to 1.285 percent, signaling investors are betting central bankers will raise their benchmark interest rate a quarter percentage point from a 45-year low of 1 percent.

The new orders index, which accounts for about a third of the total, rose to 77.6, the highest since July 1950, from 73.7 in November. The production index, a gauge of work being performed, increased to 73.0 from 68.3.

``Across just about every customer base we have, we see strength of orders,'' said Usher. ``We have booked out the first quarter completely.''

Factory Jobs

The manufacturing group's employment index rose to 55.5 in December from 51. The inventories index fell to 47.3 from 50, indicating inventories are being run down at a faster pace and hinting production may remain elevated to meet demand.

The backlog of orders index rose to 61.0 from 59. The new export orders index increased to 60.4 from 57.9. The index of supplier deliveries, which measures how long it takes to get materials, rose to 58.8 from 56.

The supply managers' prices paid index rose to 66.0 last month from 64.

In Europe, manufacturing expanded for a fourth month in December, according to a survey compiled by NTC Research Ltd. for Reuters Group Plc. An index based on a survey of about 3,000 companies based in the 12 nations sharing the euro rose to 52.4 during the month from November's 52.2. A reading above 50 shows expansion.

U.S. factory production rose 0.9 percent in November, the biggest increase since October 1999, the Federal Reserve reported last month.

Even with the gain, makers of long-lasting goods such as computers and machinery weren't able to keep up with sales. The number of durable goods orders waiting to be filled rose 0.4 percent in November to reach the highest level since March 2002, figures from the Commerce Department showed last month.

Inventories

Makers of durable goods had 1.42 months' worth of merchandise in stock at the current sales pace in November, the fewest on record. The drop came after sales rose 0.1 percent during the month and inventories dropped by the same amount.

Inventories of some products are ``dangerously low,'' said Alexander Lidow, chief executive of International Rectifier Corp., an El Segundo, California-based maker of semiconductors for home appliances, in a televised interview with Bloomberg News Tuesday. ``So I'd say that, if anything, we need to have more inventory in the pipeline. We'll probably see a fairly prolonged recovery, and we're just in the early phases.''

Global chip sales will rise 18 percent this year, the biggest increase since 2000, as demand for personal computers and mobile phones improves, according to the results of a revised forecast issued this week by market researcher IDC. The Framingham, Massachusetts-based researcher updated an April prediction of 16 percent growth after a ``very strong'' second-half recovery.

The economy probably grew at a 4 percent annual pace last quarter following an 8.2 percent rate from July through September that was the strongest in almost 20 years, according to the median estimate of economists surveyed earlier last month by Bloomberg News. It's forecast to grow 4.4 percent this year, the most since 1999, according to the median forecast.

Coachman

Inventory restocking may have accounted for 0.6 percentage point of growth in the last three months of 2003 and may contribute 0.4 percentage point this year, according to a forecast from economists at Lehman Brothers Inc. in New York.

Lean inventories are already causing some companies problems. Elkhart, Indiana-based Coachmen Industries Inc., the maker of the best-selling U.S. travel trailer, said last month that 2003 earnings will be less than it forecast in October because of a shortage of parts needed to make its recreational vehicles.

Then, Coachmen said it anticipated supplies of parts including ovens and ranges for recreational vehicles would increase in the fourth quarter. The situation has worsened, and a shortage may continue through February, said Joseph Tomczak, the company's chief financial officer.

Delphi Corp. is among manufacturers expecting to benefit from more production. The Troy, Michigan-based company, the world's largest maker of auto parts, said last month it expects earnings of $280 million to $380 million in 2004, after a projecting a loss for 2003. Production of cars and light trucks will rise to 16.3 million this year from 16 million in 2003, Chief Financial Officer Alan Dawes said in an interview.

Last Updated: January 2, 2004 15:47 EST



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