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U.S. manufacturing index hits 20-year high

By SHIHOKO GOTO, UPI Senior Business Correspondent

WASHINGTON, Jan. 2 (UPI) -- The manufacturing sector is hotter than ever, and its latest surge could indicate a robust recovery for the U.S. economy in 2004, according to the Institute for Supply Management.

The ISM's key manufacturing index reached 66.2 for December, its highest level since December 1983, up from 62.8 the previous month. It also marked the sixth consecutive month of expansion for the manufacturing sector.

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Meanwhile, its new order index increased to 77.6 from 73.7, which was its highest reading since July 1950. The production index too gained to 73.0 from a reading of 68.3 in November.

The December results were certainly much stronger than what Wall Street analysts had expected. Indeed, there had been concerns throughout that even as the economy showed signs of expansion towards the latter half of the year, it not only did not create jobs, but it also did not improve prospects for the manufacturing sector.

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The latest ISM report, however, indicates otherwise, particularly in the manufacturing sector.

"With the PMI growing at an accelerating rate, the manufacturing sector enjoyed its best month since December 1983. Much of the momentum is in New Orders, as the Index is the highest reported reading since July 1950. The strength in December's data provides significant encouragement for prospects in the first quarter of 2004," stated Norbert Ore, chairman of the institute in releasing the latest findings.

Indeed, even job prospects in the manufacturing sector appeared to be approving as the employment index grew for the second straight month, up to 55.5 from 51.0 the previous month. The figure had been contracting for the past 37 months up to October 2003.

That figure alone should provide some comfort to the Bush administration as it gears up for a presidential election year, when job prospects will be a key political issue. Employment in the manufacturing sector in particular has been a politically sensitive topic, particularly as policymakers on Capitol Hill have been focusing on the exodus of blue- and less skilled white-collar jobs overseas, particularly to China and India.

The institute found that of the 20 industries in the manufacturing sector, 17 reported growth, including transportation, photographic equipment, printing, computers, furniture, food, and electronic components. It also noted that there was no reported shortage of commodities, even though there were a number of products that were seeing a rise in prices, including aluminum, copper, steel, and natural gas. An increase in commodity prices makes manufacturing more costly, and thus squeezes the profit margins of businesses.

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Another positive development was the decline in manufacturers' inventories, which fell to 47.3 from 50.0, indicating that demand is on the increase, allowing producers to sell off their goods without much time lag. Also, export orders increase to 60.4 from 57.9.

Despite such marked gains, however, ISM's Ore remained cautious of becoming overly buoyant about future prospects.

"The month-over-month growth from November to December indicates a rapid recovery taking place in the sector, though there are still some businesses lagging and wondering when they will see the improvement that others are experiencing," he said.

Nevertheless, the latest report has provided a cheerful start to the first day of trading in the new year on Wall Street, with Nasdaq inching up 3.31 points, or 0.17 percent, to close at 2,006.68. The Dow Jones industrial average, meanwhile, ended 44.07 points, or 0.42 percent, lower at 10,409.85, largely on profit-taking. The Dow had reached an intra-day high of 10,527 soon after the latest data was announced.

Certainly, the rebound in manufacturing will be a positive factor for investors moving forward.

"The December level of the ISM index is consistent with near 7.0 percent year-over-year real GDP growth. Despite some slowing in consumption from third quarter levels, continued strength in manufacturing will boost GDP growth near 5 percent in the fourth quarter. Strong economic growth driven by business investment is a product of the dual stimulus of the Bush tax cuts passed in late May and easy Fed policy. Both of these factors will continue to boost growth in 2004, but will also lead to rising inflationary pressures," said Brian Wesbury, chief economist at Chicago-based investment bank Griffin, Kubik, Stephens &Thompson.

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Based in Tempe, Ariz., the ISM surveys executives from more than 350 industrial companies each month.

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