Wall Street Journal - January 3, 2002
Manufacturing Sector Shows Signs of Life In Latest Indication of Economic Upturn
By GREG IP Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- The battered manufacturing sector showed signs of emerging from a year-and-a-half long slump, as a widely watched survey provided another suggestion that the recession could be ending.
The Institute of Supply Management's index of manufacturing activity jumped to 48.2 in December from 44.5 in November. It was the 17th consecutive month the index was below 50, the level below which manufacturing activity is contracting, but it was still the highest level since October 2000, suggesting the rate of decline has slowed significantly. More important, the survey's index of new orders jumped to 54.9, its highest since April 2000, from 48.8 in November, suggesting that most manufacturers' order books are now expanding.
"The manufacturing sector is still struggling a little bit, [but the index] certainly suggests that it's the beginning of a recovery," said Norbert Ore, chairman of the business survey committee of the institute, formerly the National Association of Purchasing Management. The index is based on a survey of purchasing and supply executives who buy the materials for manufacturing at more than 400 companies.
The rise in the index, which exceeded economists' expectations, is the latest of a recent series of reports indicating that the economy may be turning the corner. Those include strengthened housing sales and capital-goods orders in November and improved consumer confidence and lower layoffs in December. In addition, holiday sales don't appear to have been as bad as first feared. Chain-store sales rose 0.9% last week to their highest level since the Sept. 11 terrorist attacks, on top of a 2.9% increase the previous week, according to a survey by Bank of Tokyo-Mitsubishi and UBS Warburg. Sales are up 2.6% from the same week in the previous year.
Despite the positive tone to the latest economic reports, they may still overstate underlying economic strength. Activity across the economy plunged in the wake of the Sept. 11 attacks and some of the improvement since may reflect a recovery from steeply depressed levels. The purchasing managers' index is essentially back to where it stood just before the attacks. Other temporary economic boosts could have come from unseasonably mild weather in November and early December, plus auto makers rebuilding inventories after exceptionally generous incentives drastically boosted sales in October and November. The auto-sales surge appears to now be subsiding. Furthermore, most manufacturers continued to cut payrolls, though not as much as in previous months. But fundamental improvement still shone through in Wednesday's report. Mr. Ore noted that apparel, electronics, computers and furniture, all particularly hard-hit industries, posted improvements in new orders, "very positive signs for the future for manufacturing."
There were also indications that manufacturers' steep cuts in inventories, a major cause of the sharp curtailment of production and employment, may soon come to an end. None of the 20 industries surveyed reported increased inventories in December. "In previous months, there was always some industry indicating they hadn't quite got inventories in line," said Mr. Ore.
"The inventory correction cannot continue much longer, and we continue to expect a recovery in industrial activity by spring," added Daniel J. Meckstroth, an economist at Manufacturers Alliance/ MAPI, a business association in Arlington, Va.
The report is likely to impress Fed officials, in particular Chairman Alan Greenspan, who follows the purchasing-manager survey closely. Exactly one year ago Thursday, the Fed delivered its first of 11 interest-rate cuts for the year, a surprise half-percentage point cut motivated in part by a dismal purchasing managers' report, which came out the previous day. After Wednesday's report, futures markets lowered, to between 10% and 20% from between 20% and 30%, the odds of a quarter-point cut from the current 1.75% short-term interest-rate target, at the Fed's meeting at the end of this month.