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Key Manufacturing Number Up
Tuesday, January 29, 2008
Pundits and media types hoping and pleading for a recession will be disappointed today.

Instead of more bad news they could use to help wave their recessionary pom-poms, the media got a sharp stick in the eye in the form of strong manufacturing numbers.

According to the U.S. Commerce Department, orders to factories for big-ticket manufactured goods climbed in December by the largest number since late summer, 2007.

The 5.2 percent increase in orders was a surprise finish for the manufacturing sector for 2007 -- and a welcome message to a segment of the economy many "experts" had predicted would have a lousy year in 2008. Maybe that will happen and maybe not. But from where I sit, an uptick in manufacturing numbers at year-end - a notorious cost-tightening time for businesses waiting for a new year and a new company budget -- is a harbinger of good news for the U.S. economy in 2008.

Some analysts say the big uptick is due to increased demand for mega-machines like commercial aircraft. But even excluding the transportation sector, orders posted a solid 2.6 percent gain for the month. Strong gains were also reported in demand for fabricated metal products, machinery, computers and communications equipment.

That has led some economic gurus to re-assess the current economic picture. Says the Associated Press:

"The December orders increase was more than double what had been expected. Analysts were looking for a much weaker performance, given that a key gauge of manufacturing activity had fallen to the weakest reading since April 2003. The Institute for Supply Management manufacturing index dipped to 47.7 for December. Any reading below 50 is considered recession territory for manufacturing."

I'm not saying that the economy is out of the woods or even that the manufacturing sector is poised for long-term growth. After all, 5.2% is a good number but it's only one number out of 12. And overall, 2007 wasn't a banner year for manufacturers. Orders for the year grew by just 0.97 percent following much bigger increases of 6.31 percent in 2006 and 9.45 percent in 2005. It was the sector's worst performance since orders fell by 3.17 percent in 2002, a year when the economy was just getting to its feet after the 2001 recession.

And there are surely no shortage of skeptics who see the December number as an aberration. Ian Shepherdson, chief U.S. economist for High Frequency Economics, told the AP predicted that manufacturing sector performance in 2008 will likely "turn rapidly south" as the slowdown depresses manufacturing activity.

But the December number may not be an aberration. Another key economic index - non-defense capital goods excluding aircraft - grew by 4.4 percent in December, the first hike in four months and the largest increase since last March.

If businesses keep spending money on big-ticket items in manufacturing, as indicated by the December '07 numbers, and by the advance in high technology products, as measured by the better-than-expected quarterly earnings numbers announced recently by IBM and Microsoft, then a recession is unlikely, or at least tepid if one does arise.

On Wednesday, we'll get a clearer picture. According to the AP, the government will issue its first look Wednesday at the overall economy's performance for the final three months of 2007. Many economists believe that will show the gross domestic product (GDP) was rising at an anemic 1.2 percent annual rate in the October-December quarter, a significant slowdown from the 4.9 percent growth rate of the July-September period.

As I said, not out of the woods yet. But hope, at least in the manufacturing sector, does spring eternal.

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posted by William Dorn @ 10:53 AM  
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