Instant view: Factory activity up in October

NEW YORK (BestGrowthStock) – The pace of growth in the U.S. manufacturing sector quickened unexpectedly in October, suggesting the economic recovery may be gaining some traction.

CONSTRUCTION SPENDING:

U.S. construction spending rose unexpectedly in September as investment in public projects touched the highest level in more than a year, a government report showed on Monday.

KEY POINTS: * The Institute for Supply Management said its index of national factory activity rose to 56.9 from 54.4 in September. That was the highest since May and well above the 54.0 median forecast of 77 economists surveyed by Reuters. * A reading above 50 indicates expansion in the sector. While manufacturing has grown every month since August 2009, the pace of growth had been slowing in recent months. * In October, the index of sector employment rose to 57.7 from 56.5 in September. The U.S. labor market has remained sluggish this year, with the jobless rate at 9.6 percent.

COMMENTS:

ZACH PANDL, ECONOMIST, NOMURA SECURITIES INTERNATIONAL, NEW YORK:

“It is clear that stronger growth overseas and the weakening of the U.S. dollar has provided a significant boost to U.S. manufacturers.

“ISM has outpaced overall GDP growth this year and we think that is maybe because manufacturing has more exposure to overseas demand than the rest of the U.S. business sector.

“The strong prices paid component is consistent with the idea that the global economy if not the U.S. economy is growing quite quickly. You are also seeing intensifying commodity price pressures.

“No major surprise (in construction spending). The major disappointment is perhaps the non-residential investment spending declined. It suggests the trend in commercial real estate sector is still pretty weak.”

STEVEN WOOD, CHIEF ECONOMIST, INSIGHT ECONOMICS, DANVILLE, CALIFORNIA:

“Construction spending rose in September with strength in housing and government building activity. Nevertheless, the Q3 level was 8.2 percent annualized below its Q2 level, as construction activity subtracted from Q3 GDP growth. Although construction activity is now 33.1 percent below its March 2006 peak, the rate of decline has slowed over the past 9 months although the pace of this slowing has been minimal so far. Home building may have bottomed but there has been only a slight rebound from extremely low levels. Non-residential construction is still on a declining trend because of rising vacancy rates, falling rents, and tight credit conditions; further weakness is expected in the months ahead. Government building activity has become increasingly volatile with federal stimulus dollars sometimes sufficient to offset the rapid deterioration in state and local government budgets.”

CHARLES LIEBERMAN, CHIEF INVESTMENT OFFICER OF ADVISORS CAPITAL MANAGEMENT, LLC, HASBROUCK HEIGHTS, NEW JERSEY:

ISM: “It was pretty good. A lot stronger than expected.

“Prices paid are still running a bit high but really the report is just consistent with the ongoing recovery of manufacturing. It looks like manufacturing is one of the stronger parts of the economy, which is consistent with the capital investment data.

“In terms of the implications for economic growth, I don’t there’s a great deal.”

“Construction data was up… the consensus was expecting a decline. Construction has been a significant drag on the economy. Residential construction has been a drag for a couple of years, although not so over the last six months or so. Commercial construction has been a drag including the last six months or so, although it now looks like the commercial side is beginning to flatten out. And that means that construction going forward could be a small contributor to economic growth.

NORBERT ORE, CHAIR, INSTITUTE OF SUPPLY MANAGEMENT (ISM) BUSINESS SURVEY COMMITTEE, ATLANTA:

“Starting with the PMI we see a real positive this month. Given that the index had been losing about a point and a half a month for a period of time, this was a real shot in the arm for the manufacturing sector. New orders were up, a significant move. Manufacturers are willing to hire if they have positions. Unfortunately not a huge number of jobs coming out of that. Inventories were down slightly, but still growing significantly. The customer inventories index has been telling us there is room in supply changes for additional inventories.”

“A lot of new orders are being generated from exports. They are seeing growth in autos and computers as the major areas of activity. All and all a very good month for the manufacturing sector. Manufacturing continues to outpace the rest of the economy. I expect a reasonably strong manufacturing sector to finish out the year. We get a lot of comments but they just seem to be a little more optimistic and that’s been gaining. It looks like these levels of production will continue to hold. Even though inventories are relatively high compared to the averages, they are still being outpaced by new orders and that’s what we want to see at this point. New orders have recovered. People are filling in inventory now, trying to catch up. Earlier this year and last year we had new orders outpacing inventories and that put a lot of strain on companies trying to catch up. Had that gone the other way this month that would have been problematic because it would have signaled that this was involuntary inventory buildup rather than voluntary inventory buildup.”

DAVID ADER, HEAD OF GOVERNMENT BOND STRATEGY, CRT CAPITAL

GROUP, STAMFORD, CONNECTICUT:

“A duo of stronger-than-expected data, with ISM the far most important. The gain in employment suggests a decent gain in manufacturing employment, with the various subcomponents all contributing to the firm tone.”

DAVID KUPERSMITH, HEAD TRADER AT THIRD WAVE GLOBAL INVESTORS,

GREENWICH, CONNECTICUT:

“ISM looks very strong, and so did construction spending. That’s about it. The focus will be on the elections and Fed this week, so the impact from this won’t be as strong as it would have been otherwise, but the ISM is one of the more important pieces of data out there, and the Fed will be looking at it as it prepares its comments. One number won’t impact the amount of QE we could get, but the amount of manufacturing activity is important and this is the best gauge of that.”

MARKET REACTION: STOCKS: U.S. stock indexes added to gains BONDS: U.S. Treasury debt prices trimmed gains DOLLAR: U.S. dollar rose against the euro and yen

Instant view: Factory activity up in October