Business activity in the U.S. rebounded in May after declining for the first time in more than three years last month, a sign manufacturing may contribute to economic growth this quarter.
The MNI Chicago Report’s business barometer rose to 58.7, exceeding all forecasts in a Bloomberg survey and the highest since March 2012, from 49 in April. A reading greater than 50 signals expansion. The median forecast of 54 economists polled was 50.
Manufacturing makes up about 12 percent of the economy and may be helped as consumer purchases of automobiles and housing keeps factories running. Nonetheless, cutbacks in planned federal government spending took effect in March and a higher payroll tax could slow growth.
“On domestic demand in general, you’re seeing evidence that the recovery is very much on track,” Scott Brown, an economist at Raymond James & Associates in St. Petersburg, Florida, said ahead of the report. “The fundamentals are improving.”
Consumer confidence rose in May to the highest level in almost six years as a rising stock market and property values helped lift Americans’ outlook on the economy.
The Thomson Reuters/University of Michigan final index of sentiment increased to 84.5 in May, the strongest since July 2007, from 76.4 a month earlier. The median forecast in a Bloomberg survey called for the gauge to hold at its preliminary reading of 83.7.
Stocks held earlier losses following the reports. The Standard & Poor’s 500 Index dropped 0.2 percent to 1,651.11 at 11 a.m. in New York.
The 9.7 point jump in the Chicago index was the biggest since July 1983. Projections in the Bloomberg survey ranged from 47.5 to 53.8.
The employment gauge advanced to 56.9, the highest since January, from 48.7 in the prior month, today’s report showed.
“Manufacturing hiring ground to a halt in the April jobs report,” said Brian Jones, senior U.S. economist in New York at Societe Generale. “If that’s picking up steam, that means that the labor market is going to be improving. It’s just another positive for the economy going into the summer months.”
The measure of production increased to 62.7, the highest since March 2012, from 49.9.
Orders also climbed, a sign manufacturing output will keep expanding next month. The index of new bookings increased to 58.1, a three-month high, from 53.2.
The index of prices paid rose to 55.3 this month from 51 in April.
Companies expecting some pickup in manufacturing include Weyerhaeuser Co., (WY:US) which has benefitted from a rebound in the housing market.
“We’ve got a lot of leverage to the housing industry through our timberlands, our wood products manufacturing and our homebuilding business,” said chief executive officer Daniel S. Fulton in a May 21 presentation. “And we’re finally at a stage where I can say with a lot of confidence, housing recovery is underway.”
As housing helps, manufacturing is also benefitting from demand for autos. Cars (SAARTOTL) and light trucks sold at an average 15.3 million annualized rate in the first quarter, the most since the same period in 2008, according to figures from Ward’s Automotive Group.
Still, the lagged effect from a two percentage-point jump in the payroll tax at the start of 2013 could hamper economic growth this quarter, and $85 billion in automatic budget cuts that took hold in March could also hold back expansion.
Economists watch the Chicago index and other regional manufacturing reports for an early reading on the national outlook. The Chicago group says its membership includes both manufacturers and service providers, making the gauge a measure of overall growth. Its members have operations across the U.S. and abroad.
The Federal Reserve Bank of New York’s Empire (EMPRGBCI) State measure showed manufacturing unexpectedly shrank in May, declining to minus 1.4 from 3.1 in April. The Federal Reserve Bank of Philadelphia’s index also showed activity fell.
The ISM’s monthly national factory index probably also retreated this month, according to the median forecast of economists surveyed. The Tempe, Arizona-based group’s figures are due June 3.
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