Factory Report Offers Hope for Rebound

The nation’s beaten-up manufacturing sector continued to deteriorate last month, but there were signs that the worst of the downturn may be over and that growth could resume this year, according to a report issued Tuesday.

The National Assn. of Purchasing Management said its closely watched index of manufacturing activity improved to 47.9 last month from 43.6 in July, the best since last November and the biggest monthly jump in more than five years. The reading far exceeded analyst estimates of 44.

Though any measurement below 50 indicates that the sector is contracting, two important components displayed growth.

New orders, a gauge of future activity, jumped to 53.1 from 46.3, while current-day production increased to 52.2 from 46.4. Together, those two components represent 55% of the overall measure.

They were offset by, among other factors, weakness in employment in the sector. The numbers in the survey indicate a relative ranking based on interviews with industry managers.

The report “strongly suggests that the slide in the manufacturing sector may have bottomed out,” said Mark Vitner, an economist at First Union Securities in Charlotte, N.C.

Historically, large monthly surges in new orders have foreshadowed continued strong growth, Vitner said.

The stock market initially greeted the NAPM survey enthusiastically, sending the Dow Jones industrial average up more than 232 points in the morning. But stocks fell in the afternoon, in part due to conflicting messages sent by other economic data released Tuesday.

The manufacturing sector has been trapped in a brutal downturn for more than a year even as the U.S. itself has managed to narrowly skirt a recession. Manufacturers have been especially hard hit by a sharp drop in corporate capital spending on technology and industrial equipment. The sector also is suffering from a weakening global economy.

Improvement in manufacturing, which makes up about 17% of the U.S. economy, could be an important first step in a broader economic recovery, analysts said. Though manufacturing plays a smaller economic role today than it has in past decades, it nonetheless is viewed as a leading-edge sector.

The report fed nascent hopes that the U.S. economy has hit bottom and could begin to slowly improve in the fourth quarter.

“It doesn’t mean that all of our economic problems are behind us,” said Diane Swonk, chief economist at Bank One Corp. in Chicago. “It just means the worst this economy has had to endure is behind us.”

The NAPM report sparked a rally in the U.S. dollar, with the greenback jumping almost 3% against Europe’s common currency, the euro. The hint of a rebound in the U.S. economy caused European investors to buy dollars to invest in U.S. assets. However, the stronger dollar can hurt domestic manufacturers by making their goods more expensive in overseas markets.

Other data released Tuesday gave slightly less encouraging messages.

U.S. construction spending declined 0.1% in July, the fifth straight month without an increase, the Commerce Department reported. Construction of offices and hotels fell, as did home-improvement spending.

Meanwhile, major auto makers reported that sales declined in August. Sales of North American-built vehicles fell 7.6% at General Motors Corp. and 8.4% at Ford Motor Co. The falloff may indicate that this year’s layoffs and soft consumer sentiment are taking a toll, experts said.

Also, the NAPM report indicated that technology and capital spending remain sore spots. Though 12 of the 20 industries surveyed reported an increase in new orders in August, two of the sectors that experienced declines were electronics; and industrial and commercial equipment and computers.

Many analysts doubt the tech sector will revive before late next year.

The NAPM report also showed that employment remains weak. Its August reading was 40.8, though that was up from 37.2 in July.

Nonetheless, many economists were buoyed by the report, including continued sizable liquidation of inventories.

“The inventory correction in many industries is essentially complete,” said Peter Kretzmer, economist with Banc of America Securities in New York.