US Manufacturing Activity Expanded in December

• The Institute for Supply Management (ISM) manufacturing index stood at 50.7 in December 2012, which was up from 49.5 in the previous month and slightly better than expectations for an increase to 50.4.
• Business activity was weighed down until the end of 2012 as sentiment soured against the heightened uncertainty surrounding the effect of the impending fiscal cliff. With US policymakers passing legislation to avoid income tax increases on the majority of Americans, some of the uncertainty should be removed, thereby setting the stage for an improvement in the pace of overall economic activity in the coming months.
• In a separate report, construction spending fell by 0.3% in November 2012, missing expectations for a 0.6% increase going into the report.

Activity in the US manufacturing sector expanded in December 2012 as evidenced by the ISM manufacturing index rising to 50.7 in the month (a reading above 50 indicates the sector is generally expanding). The pickup in activity came after the manufacturing sector unexpectedly contracted in November as the ISM manufacturing index fell to its lowest level since June 2009 at 49.5. Market expectations had been for a slightly smaller increase in the measure to 50.4.

The improvement in the headline index in December reflected sharp increases in the “employment” and “supplier delivery” components. “Employment” jumped by 4.3 points to a three-month high of 52.7, therein indicating that firms increased their pace of hiring in the month. “Supplier deliveries” rose to 54.7, which was its highest level since June 2011, from 50.3 in November. This meant that shipments from suppliers slowed significantly in the month and indicated that suppliers may be facing capacity constraints since delivery times tend to increase when demand rises. The “inventory change” component fell 2.0 points to 43.0 in December, thereby indicating that manufacturing inventories contracted at their fastest rate since December 2009. The drawdown of stockpiles came as the growth in production moderated, with the index declining to 52.6 from 53.7 in the previous month. The growth in new orders was unchanged in December as the component held at 50.3.

The December ISM manufacturing report is encouraging, and the accompanying comments from survey respondents were fairly upbeat, with mentions that “orders are staying stronger than normal” and that the economy seems to be “turning the corner”. The pickup in employment gains is particularly welcomed as is the sharp improvement in the spread between the “new orders” and “inventory change” components (considered a key indicator of future activity) to a seven-month high at 7.3. Business activity was weighed down until the end of 2012 as sentiment soured against the heightened uncertainty surrounding the effect of the impending fiscal cliff. With US policymakers passing legislation to avoid income tax increases on the majority of Americans, some of the uncertainty should be removed, thereby setting the stage for an improvement in the pace of overall economic activity in the coming months.

In a separate release this morning, construction spending in the US fell by 0.3% in November 2012, thereby missing the 0.6% increase expected by markets. The initially reported 1.4% increase in October was revised downward to a 0.7% gain to match the upwardly revised increase in September (previously reported as a 0.5% gain). The weakness in November was concentrated in the non-residential sector (-0.6%) although continued improvement in the residential sector (0.4%) provided some offset. Both public- (-0.4%) and private-construction spending (-0.2) declined in the month.

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.

To subscribe or visit go to:  http://www.riskcenter.com