U.S. manufacturing sector expanding, but risks remain

EghtesadOnline: U.S. factory activity increased for a second straight month in October amid a pickup in production and hiring, supporting views that the embattled manufacturing sector would regain some momentum in the fourth quarter.

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02 November 2016

The Institute for Supply Management (ISM) on Tuesday said its index of national factory activity rose 0.4 percentage point to a reading of 51.9 percent last month. A reading above 50 indicates an expansion in manufacturing, which accounts for about 12 percent of the U.S. economy.

According to Reuters, manufacturing has suffered a prolonged slump in the aftermath of the dollar's surge between June 2014 and December 2015, which has constrained exports. Activity has also been hurt by the collapse in oil drilling after oil prices plunged.

"The latest data suggest that the manufacturing sector is starting to pick up some momentum following a weak run through most of the year so far," said Daniel Silver, an economist at JPMorgan in New York. "The sector is due for some improvement as some of the earlier drags that impacted the sector fade." The ISM production sub-index gained 1.8 percentage points to 54.6. But a gauge of new orders slipped to a reading of 52.1 from 55.1 in September, suggesting any future gains in manufacturing activity would be modest. A measure of factory employment jumped 3.2 percentage points to a reading of 52.9.

The data came as Federal Reserve officials gathered for a two-day meeting to deliberate on monetary policy.

The U.S. central bank is not expected to raise rates at the end of the meeting on Wednesday, which comes less than a week before the Nov. 8 presidential election, but is expected to do so in December.

Another report from data firm Markit also suggested an improvement in factory conditions in October. U.S. financial markets were little moved by the data amid jitters over the outcome of the acrimonious election.

The dollar was trading lower against a basket of currencies. U.S. stocks and Treasuries were also lower.

MILD GAINS

Weak manufacturing has contributed to business spending on equipment declining for four straight quarters. While there are signs that a turnaround may be imminent, any improvement in the factory sector will likely be mild.

Heavy machinery maker Caterpillar (CAT.N) last week reported a 49 percent drop in third-quarter profit from a year ago and lowered its full-year revenue outlook for the second time this year. Caterpillar said demand for new heavy machinery had been undercut by an "abundance" of used construction equipment, a "substantial" number of idle locomotives and a "significant" number of idle mining trucks.

Though the dollar's rally appears to have largely faded, the greenback has so far this year gained 0.7 percent against the currencies of the United States' main trading partners.

"It still seems somewhat premature to get comfortable with the outlook for the sector, given a strong dollar and weak global growth," said Kevin Cummins, senior economist at RBS in Stamford, Connecticut.

Last month, 10 manufacturing industries, including nonmetallic mineral products, furniture, and computer and electronic products reported growth. The eight industries reporting contraction in October included wood products, apparel, primary metals and electrical equipment, and appliances and components.

Manufacturers in the primary metals sector said they expected a "considerable" slowdown in October and November, noting that production was down 20 percent. Machinery manufacturers reported that business was up "significantly" because of a hurricane and other storms.

In a third report on Tuesday, the Commerce Department said construction spending slipped 0.4 percent in September as outlays on nonresidential structures recorded their biggest drop since December 2015.

There were also declines in spending on public construction projects, which fell to its lowest level since March 2014. Outlays on state and local government construction projects dropped for a third straight month.

"The disappointing reading makes us less optimistic for the fourth quarter," said Andrew Hollenhorst, an economist at Citigroup in New York.