WRAPUP 5-US manufacturing grows in Jan; spending up a touch

* ISM Jan manufacturing index rises to highest since 2004

* U.S. consumer spending up slightly in December

* Incomes up for sixth straight month

* Savings level highest in six months
(Adds analyst comment, U.S. budget proposal, updates markets
reaction)

By Steven C. Johnson

NEW YORK, Feb 1 (BestGrowthStock) – U.S. manufacturing expanded in
January at its fastest pace since 2004 but consumers increased
their spending only slightly in December, worried by job
prospects and the state of the economy.

Although the manufacturing sector has been expanding since
August, the data released on Monday showed that the economic
recovery is likely to be modest, especially with the jobless
rate at 10 percent, an almost 26-year high.

“The U.S. manufacturing sector is showing clear and
consistent signs of growth and expansion. That said, the
elephant in the room remains employment, or more precisely,
unemployment,” said Michael Woolfolk, FX strategist at BNY
Mellon in New York.

The Labor Department is to release its monthly report on
nonfarm payrolls on Friday, the most closely-watched data on
the jobs market.

President Barack Obama on Monday sent a $3.8 trillion
budget request to Congress that would narrow the federal
deficit by curbing 120 federal programs but also set aside $100
billion to tackle unemployment. [ID:nN31157907]

The Institute for Supply management said its index of
national factory activity rose to a reading of 58.4 from 54.9
in December, handily beating economists’ median forecast of a
rise to 55.5.

A reading above 50 indicates growth in the sector. The
prices paid component was at its highest since August 2008.

The manufacturing data helped propel a rise in U.S. stocks (Read more about the stock market today. ),
with all three major indexes rising more than 1 percent, while
government bond prices fell as the demand for less risky assets
declined.

The data showed the U.S. economy was keeping pace with
others showing expanded factory activity. Chinese manufacturing
grew at a near record pace in January. For more see
[ID:nN01153088].

Economists said gains were driven by businesses
replenishing inventories, which fell sharply during the
recession.

“It is telling me that the first half of 2010 is going to
be supported by the restocking,” said Stephen Gallagher, chief
U.S. economist at Societe Generale in New York.

“We have a 3 percent to 3.5 percent growth range for the
first half of 2010 and based on these numbers we might be
underestimating the growth.”

The U.S. economy grew at a 5.7 percent annual pace in the
fourth quarter, its fastest clip in six years, driven by a
sharp slowdown in the rate at which businesses reduced stocks
of unsold goods, the government said on Friday.

But while the ISM employment component hit its highest
level in nearly three years, some economists said the
month-on-month gain was fairly modest.

“All of the employment numbers are showing that the huge
losses in jobs are well behind us but we are not gaining in
jobs either,” said Jay Mueller, senior portfolio manager at
Wells Capital Management in Milwaukee.

Norbert Ore, chairman of the ISM’s Manufacturing Business
Survey Committee, said the employment index is “a good
indicator of sentiment rather than actual jobs.”

He added: “I do think manufacturers are willing to hire if
they have the need, but I think it’s premature to expect a lot
of job growth.”

Economists polled by Reuters expect the government’s
nonfarm payrolls report on Friday to show the economy added
5,000 jobs last month after shedding 97,000 jobs in December.
That would be only the second month of jobs gains since
December 2007.

CAUTIOUS CONSUMERS

A separate Commerce Department report showed consumers kept
a tight grip on their wallets in December, with spending up by
just 0.2 percent after increasing by an upwardly revised 0.7
percent in November.

It was the third straight monthly gain in spending, which
accounts for about two-thirds of the U.S. economy, but it was
less than economists had expected. For the 2009 full year,
consumer spending fell 0.4 percent, the largest drop since
1938.

December’s slight spending increase came even as real
disposable income climbed 0.3 percent, following a 0.3 percent
rise in November. The rise in income boosted the savings rate
to its highest level since June.

Commerce Department data also showed the personal
consumption expenditures price index, excluding food and
energy, rose 1.5 percent in December from a year earlier. The
index, which is a key inflation measure monitored by the U.S.
Federal Reserve, rose 1.4 percent in November.

“It suggests that the Fed still has some time to keep
interest rates low,” said Gary Thayer, chief macrostrategist at
Wells Fargo Advisors in St. Louis.

Low interest rates and the aggressive fiscal spending
undertaken to prevent a recession turning into a depression
have caused a massive rise in the U.S. budget deficit.

President Obama on Monday projected the shortfall would
peak at a record of $1.56 trillion in 2010, or 10.6 percent of
gross domestic product, before easing.

The U.S. central bank left benchmark interest rates near
zero last week and repeated a pledge to keep them low for an
extended period.

Banks stopped tightening lending standards on many types of
loans in the fourth quarter of 2009, the Fed said on Monday,
although loan demand from households and businesses fell.

Separate Commerce Department data showed construction
spending fell 1.2 percent in December to the lowest level since
2003, hurt by a sharp drop in private residential and state and
local government construction. [ID:nN29161976]

For graphics on US manufacturing and personal consumption,
pls see: http://link.reuters.com/zej96h and
http://link.reuters.com/sym96h

Stock Investing
(Reporting by Steven C. Johnson in New York and Lucia Mutikani
in Washington; Additional reporting by Ellen Freilich, John
Parry and Emily Flitter in New York; Editing by James
Dalgleish, Dan Grebler, Leslie Adler)

WRAPUP 5-US manufacturing grows in Jan; spending up a touch