Manufacturing in U.S. unexpectedly grows on orders

Manufacturing unexpectedly expanded in September after three months of contraction, reflecting stronger orders that ease concern the U.S. economy will slow further.

The Institute for Supply Management’s factory index rose to 51.5 last month from 49.6 in August, the Tempe, Ariz.-based group said today (Oct. 1). Readings above 50 show expansion, and the September measure exceeded the most optimistic forecast in a Bloomberg survey.

Stocks extended gains after the figures showed American factories are holding up in contrast to their counterparts in Europe and Asia. Sustained strength in motor vehicle sales and a rebound in demand for home construction materials are helping cushion manufacturers from weaker exports and cutbacks in business investment.

“Housing is definitely supporting,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The economy still seems to be expanding, even if modestly, and that should keep overall manufacturing growing.” Still, “it’s hard to see things materially accelerating from here.”

The median forecast in the Bloomberg survey was 49.7, and estimates from the 76 economists surveyed ranged from 48 to 51.2. A reading above 42.6 generally indicates an expansion in the overall economy, the ISM said. The gauge averaged 55.2 in 2011 and 57.3 a year earlier.

Homebuilding outlays climbed 0.9% in August, a report from the Commerce Department showed today. A drop in non-residential projects pushed down overall construction spending by 0.6%, the most since July 2011.

Federal Reserve Chairman Ben Bernanke today renewed a pledge to sustain record stimulus even after the U.S. expansion gains strength, while saying policy makers don’t expect the economy to remain weak through 2015.

“We expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens,” Bernanke said in a speech in Indianapolis. Policy makers’ forecast to hold the main interest rate near zero until at least mid-2015 “doesn’t mean that we expect the economy to be weak through” that year.

The ISM’s new orders measure rose to a four-month high of 52.3 from 47.1. The employment index advanced to 54.7 from an almost three-year low of 51.6 the prior month. The gain from August was the biggest since October 2009. The group’s measures of production, export demand, prices paid and order backlogs also climbed in September.

A pickup in new-home construction and stronger auto sales are sources of strength for manufacturing. Housing starts increased in August, reflecting the strongest pace of single- family projects in more than two years, Commerce Department figures showed Sept. 19.

Autos in August sold at a 14.46 million annual rate, the fastest since the surge in August 2009 tied to the government’s “cash-for-clunkers” program. They were up from a 14.05 million pace in July, according to data from Ward’s Automotive Group.

The ISM figures compare with others showing weakness worldwide. In the euro-area, manufacturing contracted for a 14th month in September, suggesting the economy may have struggled to avoid a recession in the third quarter. A gauge of the industry in the 17-nation currency region based on a survey of purchasing managers was 46.1, Markit Economics said today. The index has held for 14 months below 50, indicating contraction, and fell as low as 44 in July.

“Manufacturing in the U.S. looks surprisingly good against a backdrop of weak performance in China and the euro area and the looming fiscal cliff,” said Dirk Chlench, head of bond research at Landesbank Baden-Wuerttemberg in Stuttgart, Germany, who had the highest ISM projection, 51.2, in the Bloomberg survey.

Still, some companies, like steel-processor Worthington Industries Inc., are tempering their outlook.

“We don’t have a great deal of clarity on where the economy is going,” John McConnell, the Columbus, Ohio-based company’s chairman and CEO, said on a Sept. 27 earnings call. “We’re also not saying that everything’s horrible out there. We’re saying we have some reason to be cautious.”