The ISM manufacturing index remained in expansionary territory for the eighteenth consecutive month in January, and the pace of growth accelerated for the sixth straight month as the index rose to 60.8 from 58.5 in December (a reading above 50 indicates the sector is generally expanding). The unexpected increase (the market expected a decline to 58.0) pushes the index to its highest level since May 2004. The employment component also increased in the month, rising to 61.7 from 58.9 in December and representing the measure’s highest level since April 1973.

In addition to the solid headline reading, the details of the ISM manufacturing index were also extremely positive. The new orders component jumped to 67.8 in the month, its highest level since January 2004, following the previous month’s increase to 62.0, and the production index edged higher to 63.5 from 63.0 in the previous month, representing its highest level since last May. The pace of expansion in employment rose to its highest level in almost four decades, increasing to 61.7 from 58.9 in December. Growth in manufacturers’ inventories increased following the previous month’s sharp decline, rising to 52.4 from 51.8. With respect to inflationary pressures, the prices paid component jumped 9.0 points to 81.5 from 72.5 in December, the rapidest pace of growth since July 2008.

With the unexpected acceleration in the pace of growth in the manufacturing sector in January, the ISM index moved even further into expansionary territory and is well above the series’ 20-year average of 51.2. This result suggests that the goods-producing side of the U.S. economy is maintaining its positive momentum entering 2011. Indeed, the greater than expected drawdown in inventories in the final quarter of 2010 suggests that there is scope for manufacturing to remain strong against a background of improving demand. As well, the solid increase in the employment sub-index is consistent with our view that labour market conditions are continuing to improve, and we expect that Friday’s payroll report will show private-sector employment expanded by 141,000.

In a separate release this morning, construction spending in the U.S. closed out 2010 with an unexpected 2.5% decline in December. Market expectations were for spending to rise 0.1% in the month. As well, November’s initially reported 0.4% increase was revised downward to show a 0.2% decrease of its own. The weakness in December was fairly broad-based across sectors with private and public-sector construction spending down 2.2% and 2.8%, respectively. Total residential construction decreased by 4.4% in the month while non-residential construction declined by 1.6%. For 2010 as a whole, construction spending was down 10.3% from 2009 and was at its lowest dollar value ($814 billion) since 2000.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

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