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Under the headline “Economic Data Indicate Strength,” the Wall Street Journal (2/4, Sparshott, Leo, subscription required) reports that service sector growth is rising at a sharp pace, mirroring the performance of the manufacturing sector, while productivity is also on the rise. That may change, and “there is a good chance that productivity will slow further this year, as firms are increasingly forced to hire more workers to expand output,” one economist said. But overall, the predominance of indicators are pointing to stronger economic momentum for 2011.

The AP (2/4) concentrates its reporting on “the US service sector, which employs nearly 90 percent of the work force.” The sector’s increases bode well for the job market. The index from the Institute for Supply Management “rose to 54.5, the highest since May 2006. The employment indexes in the manufacturing and service sector indexes both rose in January, a positive sign that the economy may soon generate more jobs.” And, “the report’s index of new orders jumped to 64.9 last month, the highest in seven years. That’s a sign that services firms will keep growing.”

Under the headline “Data Points To Stronger Growth Momentum,” Reuters (2/4) quotes Robert Dye of PNC Financial Services, who said, “Momentum from the end of 2010 is carrying over. It will be another year of recovery and repair.”

Despite Snow, Retailers See Strong January Sales. The New York Times (2/4, B3, Hauser) reports, “Retailers kicked off 2011 with better-than-expected sales in January, with some relying on discounts to clear merchandise left over from the holiday season.” Overall, “same-store sales rose 4.2 percent in January compared with a 3.3 percent increase in the month a year ago and forecasts of 2.7 percent,” and these gains “followed a holiday shopping season that was the strongest since 2006.” However, “some analysts said that January in general was not considered a good bellwether month for the rest of the year.” And “while the results exceeded forecasts, analysts said there were challenges ahead as rising costs pare profits.”

SME Daily Executive Briefing

Orders for goods jump

CHRISTOPHER S. RUGABER AP Economics Writer

9:36 a.m. CST, February 1, 2011

WASHINGTON (AP) – Factory activity expanded in January at the fastest pace in nearly seven years, as manufacturers reported a sharp jump in new orders.

The Institute for Supply Management, a private trade group, said Tuesday that its index of manufacturing activity rose last month to 60.8. The sector has expanded for 18 straight months, and January’s reading was the highest since May 2004. Any reading above 50 indicates expansion.

The manufacturing sector bottomed out at 33.3 in December 2008, the lowest point since June 1980. It has helped drive growth since the recession ended in June 2009.

Consumers are spending more on autos, appliances and other goods, while businesses have invested in more industrial machinery and computers. Those trends boosted economic growth to a 3.2 percent pace in the October-December quarter, the Commerce Department said last week.

Factories healthy pace of expansion is likely to continue in the coming months. Manufacturing firms surveyed by ISM said their backlog of orders jumped in January, pushing an index measuring that activity to 58 from 47.

U.S. factories are also benefiting from rising overseas sales. The index of export orders jumped to 62 in January, from 54.5 the previous month. That matches a recent peak reached in May.

The employment index also rose, a sign that manufacturing companies are hiring more workers. And the prices paid index, which measures whether manufacturing companies are paying more for raw materials, jumped sharply. That’s a sign that inflation could pick up soon.

If manufacturers are unable to pass on the higher costs, it could cut into their profit margins.

Chicago Purchasing Managers Index Increases to 68.8 in January

Businesses in the U.S. expanded in January at the fastest pace since July 1988, indicating the world’s largest economy has momentum at the start of the year.

The Institute for Supply Management-Chicago Inc. said today its business barometer rose this month to 68.8 from 66.8 in December. Figures greater than 50 signal expansion, and economists projected the gauge would slip to 64.5, based on the median estimate in a Bloomberg survey.

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Orders, production and employment increased as manufacturers such as Catepillar Inc. benefited from a pickup in consumer purchases and stronger export markets in emerging economies such as China. Consumer purchases in the final three months of 2010 were the strongest in more than four years, figures last week showed.

“This fortifies the stability of the recovery,” said Maxwell Clarke, chief U.S. economist at IDEAglobal in New York. “You definitely see traction from manufacturing going forward.”

Estimates from 41 economists for the Chicago purchasers’ index ranged from 60 to 71.3, according to the Bloomberg survey.

Data today from the Commerce Department showed Americans’ spending rose more than forecast in December. Household purchases increased 0.7 percent, while incomes gained 0.4 percent for a second month, the figures showed.

Stocks held gains after the reports and Treasuries fell. The Standard & Poor’s 500 Index rose 0.5 percent to 1,282.74 at 11:07 a.m. in New York. The yield on the benchmark 10-year note increased to 3.35 percent from 3.32 percent late on Jan. 28.

Orders, Employment

The Chicago group’s production gauge rose to 73.7 from December’s reading of 72.2. The gauge of new orders increased to 75.7, the highest since December 1983, from 71.3. The employment measure rose to 64.1, the strongest since May 1984, from 58.4 the prior month.

Economists watch the Chicago index and other regional manufacturing reports for an early reading on the outlook nationally. The Chicago group says its membership includes both manufacturers and service providers, making the gauge of measure of overall growth. Its members have operations across the U.S. and abroad.

Other measures of regional manufacturing have shown strength in January. The Federal Reserve Bank of New York on Jan. 18 said manufacturing expanded in that region this month, and the Philadelphia Fed said two days later that factories grew for a fourth month.

Auto Sales

Automakers are seeing sales pick up. Car purchases in December rose to a 12.53 million unit annual pace, the highest since August 2009, from 12.3 million in November, industry data showed this month.

The ISM’s monthly national factory index, due tomorrow, was probably little changed at 58 in January after 58.5 the prior month. A reading above 50 signals expansion.

A pickup in consumer demand, which accounts for about 70 percent of the U.S. economy, could add to gains in manufacturing. The Commerce Department reported last week that household purchases rose at a 4.4 percent pace in the fourth quarter, the fastest in more than four years, while the economy grew at a 3.2 percent rate.

Consumers may further ramp up spending as they benefit from an $858 billion bill extending all Bush-era tax cuts for two years. The legislation also extended the window for expanded unemployment insurance benefits through 2011, trimmed payrolls taxes and included accelerated tax depreciation for equipment purchases.

The manufacturing industry, which accounts for about 11 percent of the economy, has been at the forefront of the economic recovery that began in 2009.

Caterpillar Profit

Caterpillar, the world’s largest maker of construction equipment, posted fourth-quarter profit that topped analysts’ estimates as sales advanced in China, Australia and Latin America. Revenue climbed 62 percent to $12.8 billion from $7.9 billion a year earlier, the company said last week.

In 2011, sales will exceed $50 billion, compared with $42.59 billion in 2010, according to the company.

“There’s quite a bit of pent-up demand there yet to come,” in North America, Ed Rapp, chief financial officer of the Peoria, Illinois-based company, said last week during a conference call. “The tailwinds come as we get more robust growth.”

To contact the reporters on this story: Alexander Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net.

The economy gained strength at the end of last year as Americans spent at the fastest pace in four years and U.S. companies sold more overseas. The growth is boosting hopes for a stronger 2011.

The Commerce Department reported Friday that growth rose to an annual rate of 3.2 percent in the October-December quarter. That’s an improvement from the 2.6 percent growth in the previous quarter. And it was the best quarterly showing since the start of last year.

The economy has now consistently picked up speed since hitting a rough path in the spring.

NEW YORK/CHICAGO (Reuters) – U.S. manufacturing companies posted higher-than-expected results, as sharply improved margins boosted profits amid strong industrial demand and growth in emerging markets.

Companies including Catepillar Inc., Tyco International Ltd and Eaton Group reported strong sales and earnings, and investors were looking ahead for signs the industrial rebound would begin to affect the wider economy and boost employment.

Catepillar provided an encouraging sign for U.S. jobs but also showed that employment remains one of the main ways companies can control profit margins.

The machinery maker, which slashed nearly 30,000 full-time and contract jobs worldwide during the recession, said it had rehired about 8,200 workers worldwide in 2010, and hired another 11,000 temporary contract workers, half in the United States.

“A lot of that driven by export demand, so that was an increase in employment,” Caterpillar’s head of investor relations, Mike DeWalt, said on a conference call. “But if you look at sales, sales went up quite a bit more than that.”

Caterpillar’s operating margins jumped from 2 percent a year ago to 10 percent in the fourth quarter. Other large industrial names also expanded margins.

Caterpillar shares were up 1.7 percent at $97.33, an all-time high for the industrial bellwether.

Caterpillar reported a stronger-than-expected quarterly profit, lifted by increased sales of its machines in Asia and Latin America and a sharp rebound in demand in North America, especially from mining customers. The company also forecast it would post a 2011 profit near $6.00 per share, which is above the market consensus.

ADDING JOBS

“So far so good,” said Oliver Pursche, president of Gary Goldberg Financial Services, about the earnings season for manufacturing companies. He added that corporate comments on jobs were one of the key factors he was listening for as an investor.

“The more they talk about hiring, the more comfortable we’re going to be with that company. If you’re hiring people, your business is growing.”

Eaton is likely to grow its workforce by a few percentage points this year as markets such as autos, aerospace and non-residential construction recover from recession, the diversified industrial company’s CEO said.

“You’ll see hiring here in the U.S. as well as around the world,” Sandy Cutler told Reuters.

Eaton’s quarterly profit beat expectations on a strong truck market and higher demand for its electrical systems. The maker of hydraulics, truck transmissions and other industrial products forecast record 2011 earnings, set a stock split and announced a 17 percent dividend increase.

Tyco’s quarterly earnings more than doubled, beating Wall Street expectations amid sharply higher profits at the conglomerate’s security business, which includes the former ADT Worldwide service.

Tyco, which said it was close to finalizing acquisitions worth around $500 million, also raised its full-year forecast. Its shares were up 0.8 percent at $45 in afternoon trading. It was one of many stocks trading near multiyear highs.

Industrial shares rose 24 percent last year, lagging only the consumer discretionary sector, according to Standard & Poor’s, which recommends investors stay “overweight” in industrials amid expectations of continued global expansion.

The sector has also outrun the broader stock market in 2011, and a correction could be imminent, S&P said.

As companies keyed to industrial demand continued a trend of beating Wall Street forecasts, investors took profits in some names, like Kennametal Inc. and Timken Co.

Tool maker Kennametal, considered a pure play on industrial production, raised its full-year forecast above Street estimates amid strong demand from industrial and transportation markets. Profit at Timken, maker of bearings and specialty steel, was helped by auto and truck production and an ability to push through higher prices.

Electrical and electronics products maker Hubbell Inc also beat, as did Harsco, which provides products to metals producers.

Conglomerate Danaher Corp. showed sharply higher profits in its industrial components and test-and-measurement segments. It affirmed 2011 earnings targets.

“We expect the global economy to continue to improve in 2011, lead by the emerging markets,” Danaher CEO Larry Culp said on the company’s conference call.

WIDESPREAD OPTIMISM

Optimism among manufacturing executives is widespread. Sixty-three percent are upbeat about U.S. economic prospects over the next 12 months, according to a quarterly survey by PricewaterhouseCoopers. That marked a 28-point increase over the prior quarter.

Still, fewer than half — 48 percent — plan to add employees over the next year, PwC found, partly reflecting concerns about taxes, regulation and soft demand.

Worries about corporate taxes, especially, may keep U.S. companies from significantly boosting capacity until the second half of 2011, said analyst Brian Langenberg of Langenberg & Co. U.S. consumers remain constrained by the housing market.

A reminder that not all is well on the housing front came from the No. 1 homebuilder, DR Horton Inc, which posted a wider-than-expected loss.

“Industrial production is increasing on a global basis,” Langenberg said. “(Manufacturers) need to increase capital spending.

“When do they have to boost capacity? Now. Where? Not necessarily in the U.S.”

(Reporting by Nick Zieminski and James B. Kelleher; Additional reporting by Scott Malone in Boston; Editing by John Wallace, Matthew Lewis, Phil Berlowitz)

By REUTERS
Published: January 27, 2011

Filed at 3:04 p.m. ET

WASHINGTON  — Consumer confidence hit an eight-month high in January. The increase suggests the rising spirits that fueled a holiday shopping boom are carrying over into the new year as people feel better about the job market.

The Conference Board said today its Consumer Confidence Index climbed to 60.6 this month from 53.3 in December.

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While confidence is still far from the 90 that signals a healthy consumer mindset, the January improvement was better than expected. Some economists said the big tax relief package Congress passed in late December may have helped.

“So much for a ho-hum January,” said Jennifer Lee, senior economist at BMO Capital Markets. “The signing of the stimulus bill and all that it is intended to bring is buoying sentiment.”

The $858 billion package extended the Bush-era tax relief at all income levels for two years, provided tax breaks for businesses and reduced Social Security payroll taxes by 2 percentage points this year. The Social Security reduction will mean an estimated $1,000 in additional after-tax income for the average family, according to White House estimates.

Other analysts suggested that the recent gains in the stock market and improving labor market conditions were trumping higher gasoline prices and falling home prices. The Standard & Poor’s/Case-Shiller 20-city index showed home prices falling in most of America’s largest cities and hitting their lowest point since the housing bust in eight markets.

“The recovery in stock prices and the beginnings of an improvement in the labor market are making people feel better about the economy,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The January confidence figure was the highest last May’s 62.7. At that time, consumer attitudes were improving as economic growth seemed to be taking off. However, the economy stalled in the summer, and so did confidence.

Confidence has been depressed by unemployment that surged during the country’s worst recession since the 1930s and has stayed stubbornly high even though the downturn ended in June 2009. Confidence has not been above 90 since the recession began in December 2007.

In the Conference Board survey, the percentage of people surveyed who felt jobs were hard to get fell slightly to 43.4 percent from 46 percent in December. The share who expected to see more jobs six months from now rose to 16 percent from 14.2 percent.

That finding supported a separate report Monday from the National Association for Business Economics that showed the number of firms expressing positive views on hiring had climbed to the highest level in 12 years.

While confidence has stayed weak since the recession ended in summer 2009, consumer spending has been picking up. During the 2010 holiday shopping season, sales increased at the fastest rate in six years.

Economists are hoping that consumer confidence will keep rising in 2011 as the economy improves and unemployment declines.

Employers added 1.1 million jobs for all of 2010, but the nation still has 7.2 million fewer jobs than it did in December 2007, when the recession began. Many economists expect the nation will create twice as many jobs this year as it did last year as economic growth picks up.

The Conference Board confidence index was based on answers to questions from a survey of 5,000 U.S. households taken through Jan. 18.

By Martin  Crutsinger Associated Press
Jan.25, 2011, 2:28PM

Under the headline “Industrial Economy Builds Fresh Strength,” the Wall Street Journal (1/21, Tita, Hagerty, subscription required) quotes Jefferies & Co. analyst Stephen Volkmann as saying, “The industrial economy is stronger than many people believe.” He added, “I think there are still some legs to this recovery just to get back to normal levels” in the wake of the recession. The Journal notes earnings reports from industrial companies have been largely positive, which is portrayed as a good sign for coming reports. CEO Don Washkewicz of Parker Hannifin, which doubled its year-on-year profit for the fiscal quarter, said, “Based on the way these orders are coming through, I think this [rebound] is going to be sustainable.” Rockwell Collins and Johnson Controls also reported strong results.

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Sector Creating More Jobs Than It’s Cutting; ‘Shining Star’

The economists’ projections for this year—calling for a gain of about 2.5%, or 330,000 manufacturing jobs—won’t come close to making up for the nearly six million lost since 1997. But manufacturing should be at least a modest contributor to total U.S. employment in the next couple of years, these economists say.

After a steep slump during the recession, manufacturing is “the shining star of this recovery,” says Thomas Runiewicz, an economist at IHS. He expects total U.S. manufacturing jobs this year to rise to about 12 million. Currently, manufacturing jobs account for about 9% of all U.S. nonfarm jobs; the average pay for those jobs is roughly $22 an hour, or nearly twice the average for service jobs, according to government data.

Despite the upbeat forecasts, job growth may remain modest because many companies are finding ways to increase production through greater efficiency and automation, without adding many workers. In the third quarter, U.S. manufacturing productivity increased as output rose 7.1% from a year earlier and hours worked grew just 3%. Conrad Winkler, a vice president at the consulting firm Booz & Co. who focuses on manufacturing, says manufacturers are being very cautious in their hiring, partly to avoid the risk of having to lay off people later on.

Manufacturing is going to be a significant source of job growth over the next decade,” says Mark Zandi, chief economist at Moody’s Analytics. He says U.S. manufacturers that survived the brutal 2008-09 recession are now very competitive, with much lower labor costs and debt burdens, and so can afford to expand. While they will keep building factories overseas to address demand in emerging markets, they also will invest in U.S. plants, Mr. Zandi says. He expects manufacturing job growth to average about 2% a year through 2015.

The job growth is expected as companies replace aging equipment, take advantage of government incentives, seek energy savings and rediscover that it makes sense to produce some products, such as ovens and construction machinery, at home rather than shipping them long distances. A new tax break, approved by Congress in December, is expected to further stimulate investment by letting companies deduct from taxable income 100% of certain types of investments in 2011.

By James R. Hagerty
Wall Street Journal – Business 1/19/2011
Write to James R. Hagerty at bob.hagerty@wsj.com

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