Manufacturing expanded in July at the fastest pace in more than two years, sparked by surges in orders and production that signal companies are growing more optimistic about the U.S. economy’s prospects.
The Institute for Supply Management’s factory index jumped to 55.4, exceeding the highest projection in a Bloomberg survey of economists, from 50.9 in the prior month, according to the Tempe, Arizona-based group. Readings above 50 indicate expansion. A separate report showed first-time claims for unemployment insurance fell to the lowest in five years.
Stocks rallied on signs of a global production pickup extending from China through Europe and as central banks pledged to maintain stimulus. Strength in U.S. manufacturing, which accounts for about 12 percent of the world’s largest economy, underscores the Federal Reserve’s view that the expansion will gain momentum as the impact of federal budget cuts wanes.
“The Fed has been looking for an acceleration in second-half growth, and this is probably the first real sign that that’s going to happen,” said Michael Feroli, a former Fed staff member who is now chief U.S. economist for JPMorgan Chase & Co. in New York. “It probably gives them some comfort that their forecast may be shaping up.”
The Standard & Poor’s 500 Index climbed 1.3 percent to 1,706.87 at the close of trading in New York, topping 1,700 for the first time. The yield on the benchmark 10-year Treasury note jumped to 2.71 percent from 2.58 percent late yesterday.
Applications for unemployment insurance payments declined by 19,000 to 326,000 in the week ended July 27, the fewest since January 2008, from a revised 345,000 the prior week, the Labor Department said today in Washington.
The economy added 185,000 jobs in July after 195,000 increases in the previous two months, according to the median forecast in a Bloomberg survey. The jobless rate may have declined to 7.5 percent last month from 7.6 percent.
The 4.5-point increase in the ISM gauge from June was the biggest since June 1996. The median forecast of 84 economists surveyed by Bloomberg called for the index to climb to 52. Estimates ranged from 49.6 to 53.5.
Factories in the rest of the world are showing signs of stabilizing. U.K. manufacturing growth accelerated more than economists forecast in July. That momentum was echoed in the euro area, where manufacturing grew more than initially estimated, while China’s official factory index also showed expansion.
The ISM’s U.S. data showed a measure of orders climbed to a more than two-year high, while a gauge of production was the strongest since May 2004.
The figures help explain the Fed’s optimistic outlook. Central bankers said yesterday at the conclusion of their two-day meeting that “economic growth will pick up from its recent pace and the unemployment rate will gradually decline.” The Federal Open Market Committee also said it will maintain its $85 billion in monthly bond purchases aimed at stoking the expansion and boosting employment.
“We all have seen the bumps and slips in the first half, so I believe that we are positioned well for a good second half of the year and that this is a nice way to get that started,” Bradley Holcomb, chairman of the supply management group’s factory committee, said on a conference call today with reporters.
Manufacturing is finding support from the housing market as sales of new homes rose in June to the highest level in five years. The housing recovery has spurred demand for the appliances and furniture needed to fill them, giving companies such as Armstrong World Industries Inc. (AWI:US) a reason to invest in new facilities.
The Lancaster, Pennsylvania-based maker of flooring, ceiling and cabinets is planning to build a $40 million North American plant later this year to produce luxury vinyl tile.
“Given current and projected volumes, manufacturing in the U.S. is now a financially attractive option,” Matthew Espe, Armstrong’s chief executive officer, said in a July 29 conference call.
The ISM index of factory employment increased to 54.4, the highest since June 2012, from 48.7 in June. Economists forecast tomorrow’s Labor Department report to show a net 2,000 gain in manufacturing payrolls in July, the first increase in five months.
Sustained employment gains help explain recent increases in consumer sentiment. The Bloomberg Consumer Comfort Index rose to minus 27 last week, the strongest reading since January 2008, from minus 27.3 in the prior period.
The advance was driven by a more optimistic view of the state of the economy, with the measure improving to minus 49.8, the strongest reading since January 2008, from minus 50.5.
“The uncertainty about the economy has diminished, and that is starting to be seen as businesses pick up hiring and pick up investment plans,” said Ted Wieseman, an economist at Morgan Stanley in New York. “We are still going to have the lingering effects of sequestration in the third quarter, but the steady healing in private-sector demand is becoming more pronounced.” Wieseman projects growth will accelerate to about 3 percent by the end of the year.
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