February factory gauge shows U.S. strength

February factory gauge shows U.S. strength

American manufacturers are doing better than many of their competitors around the world as increased spending by U.S. businesses and a revival in global trade creates more demand for their products.

The Institute for Supply Management said Friday that its gauge of U.S. factory activity expanded in February for the third straight month to 54.2—continuing the biggest jump in manufacturing activity since the economic recovery started in July 2009. A reading above 50 indicates growth. Exports jumped to a nine-month high, while new orders and order backlogs, both gauges of future business, rose sharply.

The report is evidence that increased spending by U.S. businesses and consumers, the housing recovery and an uptick in global trade are helping America’s factories, which were a key engine for the nation’s recovery three years ago but weakened recently amid a global economic slowdown. The report also suggests that manufacturers aren’t nervous about the looming impact of the “sequester,” the $85 billion in across-the-board government spending cuts that kicked in Friday.

Separate reports on Friday showed that Americans are still spending despite higher taxes, while confidence among consumers rose in February to its highest level since November.

The improving outlook for U.S. factories comes as factories in many other parts of the world are facing more headwinds. Manufacturing growth slowed in China, the worlds second-biggest economy, though analysts said Lunar New Year festivities damped production. In the euro zone, factory activity is a mixed bag, but generally weak: The region’s biggest economy, Germany, saw its factories start expanding again, but manufacturers in Italy, the bloc’s third-biggest economy, slumped deeper into contraction territory. Britain’s manufacturing activity unexpectedly shrank. Factories in Brazil and Taiwan expanded, but their growth pace slowed.

U.S. “manufacturers are now seeing a rebound in domestic demand, especially the early cyclical industries,” said Joseph Carson, economist at Alliance Bernstein. “That’s helping offset some of the more sluggish growth overseas.”

The big drivers of manufacturing’s latest rebound are a jump in business spending and a pickup in global trade, which is creating demand for U.S. exports. American businesses increased spending late last year after largely shelving investment plans before the U.S. election and keeping their inventories relatively light—both of which could mean more orders for manufacturers early this year. Meanwhile, U.S. exports to other countries helped keep the economy growing late last year, with trade adding nearly a quarter percentage point to the nation’s growth rate, which itself was revised Thursday to show a 0.1% expansion instead of a 0.1% contraction.

Robert Livingston, chief executive of Dover Corp., an industrial conglomerate that makes a variety of products like refrigeration equipment, says his company’s sales are picking up gradually this year thanks to improvements in the domestic and global economy.

The recovery of the housing market and increased car sales in the U.S. are boosting demand in the manufacturing sector, he said. “I do think 2013 will be better than the last two years.”

Another boost for the company, which had 2012 revenue of $8.1 billion, has been an uptick in sales overseas. Roughly 50% of the firm’s business comes from outside the U.S., including 15% from Europe and 20% from Asia. While Mr. Livingston isn’t expecting a big jump in overseas business, he is relieved that last year’s spell of weakness is over. “There’s a little more confidence with our customers today than four or five months ago,” he said.

After expanding facilities in places like China, India and Brazil in recent years, Dover is now eyeing expansion plans in the U.S., including for a factory in Conyers, Ga., near Atlanta, that makes refrigeration systems for grocery stores.

Economists and corporate executives aren’t expecting manufacturing to become a driver of the recovery the way it was three years ago. But ISM’s report suggests American manufacturers have clearly gained traction after throttling back production last year. An index tracking new orders rose to 57.8, above January’s 53.3 reading—the biggest jump since March 2010—while a separate index for production rose to 57.6 from 53.6.

The “overall tone in manufacturing is clearly positive,” said Brad Holcomb, chairman of the ISM’s manufacturing-survey panel. “As for how sustainable this is, we suspect we will stay in a pretty tight range for the next couple of months.”

Source: The Wall Street Journal