Manufacturing in U.S. expands at faster pace on production

Manufacturing in the U.S. expanded at a faster pace in March as gains in production and orders showed the industry was mending at the close of a winter-depressed first quarter.

The Institute for Supply Management’s index increased to 53.7, less than projected, from 53.2 a month earlier, the Tempe, Ariz.-based group’s report showed on Tuesday. Readings above 50 indicate growth. The median forecast in a Bloomberg survey of economists was 54.

Production picked up last month as temperatures warmed and suppliers had greater success making deliveries of parts to factories. Stronger consumer spending along with a rebound in business equipment purchases would help keep factories humming and provide a bigger source of strength for the economy.

“We’re on track for decent growth in manufacturing, just not quite as robust as we saw in the second half of last year,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, who correctly forecast the ISM figure. “The weakness we saw in the very early part of this year is going to abate and we’ll see better growth.”

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Estimates for the factory index from 81 economists in the Bloomberg survey ranged from 51.5 to 56. Manufacturing accounts for about 12 percent of the economy. Of the 18 industries covered, 14 reported growth in March, led by petroleum, the ISM said.

Stocks held gains after the figures, with the Standard & Poor’s 500 Index topping its intraday record. The S&P 500 advanced 0.5 percent to 1,882.09 at 10:43 a.m. in New York.

China manufacturing

Elsewhere, a gauge of manufacturing in China, the world’s second-biggest economy behind the U.S., fell last month to the lowest level since July.

In the euro area, manufacturing was little changed in March from the prior month. An index of U.K. factories dropped to an eight-month low.

The ISM’s gauge of U.S. new orders climbed to 55.1 last month from 54.5 in February. The index of orders waiting to be filled jumped to 57.5, the highest since April 2011, from 52.

A measure of production surged to 55.9 from 48.2 the prior month.

The gains in orders, production and backlogs indicate factory employment may pick up after slowing last month. The group’s measure of manufacturing jobs declined to 51.1, the lowest since June, from 52.3.

Customer stockpiles

Customer inventories shrank at a faster pace in March, which may help sustain production. The ISM’s gauge dropped to 42 last month, the lowest since May 2011.

Capital spending in the first quarter probably cooled after growing at the end of 2013 at a 10.9 percent annual rate, the most in two years. Recent figures showed companies slowed the pace of equipment spending. Orders for non-military capital goods excluding aircraft dropped 1.3 percent in February after a 0.8 percent gain in January that was smaller than initially reported, according to the Commerce Department data.

Demand for all durable goods – items meant to last at least three years – climbed a more-than-forecast 2.2 percent, reflecting the biggest gain in automobile demand in a year.

Motor vehicle sales have helped keep factories busy. Cars and light trucks sold at a 15.3 million annualized rate in February, staying above the 15-million mark since November 2012 for the longest streak since February 2008.

Eaton Corp.

It remains unclear if weather masked underlying weakness in the economy, Richard Fearon, chief financial officer at Eaton Corp., which is based in Dublin and operates out of Cleveland, said last month. Eaton makes auto parts, electrical gear and hydraulics for construction equipment.

“We don’t see quite the employment growth that had been hoped and there are some areas where the growth in income, the growth in sales aren’t quite what people had hoped,” Fearon said at a conference. At the same time, I don’t “see in our order patterns evidence that it is more than just weather.”

Transportation problems earlier in the year because of snowstorms in parts of the U.S. may help explain a build-up in inventories as sales languished. The value of unsold goods in warehouses and on shelves climbed 0.4 percent in January after a 0.5 percent increase a month earlier. Purchases at factories, wholesalers and retailers declined 0.9 percent, pushing up the inventory-to-sales ratio to the highest level since October 2009, Commerce Department figures showed on March 13.

Retail sales

A report last month showed sales are starting to stabilize after bad weather kept shoppers closer to home. Retail sales increased 0.3 percent in February after falling 0.6 percent a month earlier and a 0.3 percent decrease at the end of 2013.

Demand for building materials will depend on whether home construction picks up after a three-month slide. Housing starts in February dropped to the lowest level since October, the latest Commerce Department data show.

Atlanta-based Home Depot Inc. is among those maintaining a positive outlook after frigid weather damped prospects.

“As we plan 2014, we continue to think that there’s going to be a tailwind from the housing market,” CEO Francis Blake said at a March 19 retail conference. “To the extent we can read through the weather to the areas where there’ve been fewer weather impacts, we still feel good about our planning assumptions for the year.”

Federal reserve

Fed policy makers are looking beyond the recent data showing a first-quarter growth slowdown, sticking with their tapering of monthly asset purchases.

Even as the central bank continues to pare its bond buying, Fed Chair Janet Yellen said Monday in a speech that the Fed’s “commitment is strong” to helping sustain progress in the job market.

Stagnant wages and elevated levels of long-term unemployed are among the obstacles to the recovery that merit unprecedented accommodation by the Fed for “some time,” she said.

The Federal Open Market Committee has kept the benchmark interest rate near zero since December 2008 and sought to cut borrowing costs and fuel growth through bond buying that has more than quadrupled its assets to a record $4.23 trillion.

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