Ahead of the Bell: ISM manufacturing index

posted: 8 DAYS 21 HOURS AGO

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NEW YORK -U.S. manufacturing activity likely continued to grow in January as customers restock bare shelves, although some fear high unemployment could hurt the recovery in the industrial sector and the broader economy.

Economists polled by Thomson Reuters expect the index from the Institute for Supply Management, a trade group of purchasing executives, will read 55.5 in January, compared to 55.9 in December — the highest reading since April 2006. A reading above 50 indicates growth. If January's measure stays above 50, it would be the sixth straight month of expansion.

ISM's manufacturing index, which is due out Monday at 10 a.m. EST, first showed growth in August after 18 months of contraction.

ISM had said that its index of new orders, a signal of future production, jumped in December to 65.5, the highest level in 5 years.

It's one welcome sign. On Friday, the government said the economy grew at a 5.7 percent annual rate in the fourth quarter of 2009, the fastest pace since 2003. In the third quarter, the economy grew at a 2.2 percent rate.

The increase was mainly due a slowdown in inventory reduction. Companies are feeling comfortable enough to order new goods and boost production as the economy recovers.

For example, Microsoft Corp. said Thursday that it expects corporations to start gradually spending more on technology this year. Sales of its PCs to consumers jumped in its most recent quarter thanks to offerings of cheap laptops and netbooks.

Economists continue to worry, however, about the sustainability of the manufacturing sector's domestic recovery. Once customers rebuild inventories depleted during the recession, demand for manufacturers' goods could again taper off.

Another worry is that as government stimulus programs wind down, consumers will clamp down on spending and the recovery in housing may teeter. The jobless rate read 10 percent in December, and is expected to stay elevated for years.

The ISM's employment index rose in December to 52 from 50.8, the third straight month it has topped 50. That signals companies may be more inclined to hire as they increase production. If hiring picks up, Americans with more money in their pockets could keep the economy growing at a strong pace.

But companies continue to rely on cost cuts to boost earnings. Motorola Inc. said last week that sales fell, but it posted a profit as it reduced expenses. It cut 8,000 workers in 2009.

2010-02-01 06:48:50