Factory expansion spurs growth

But stagnant incomes, cuts will test economy

Bloomberg NewsMarch 2, 2013 

— American factories expanded in February at the fastest pace in almost two years, spurred by a jump in orders that is helping propel an economy about to be tested by federal government cutbacks.

The Institute for Supply Management’s factory index rose to 54.2, the highest reading since June 2011, the Tempe, Ariz.-based group said Friday. Other data showed consumer spending rose in January even as incomes plunged, and household confidence climbed last month.

Companies such as Applied Materials are benefiting from growing demand as businesses boost spending and economies in emerging markets pick up. Combined with a rebound in housing and sustained gains in household purchases, the factory gains will help lift growth, after the economy stagnated in the fourth quarter, even as across-the-board budget cuts set in.

“The data continue to be consistent with a moderate recovery,” said Dean Maki, chief U.S. economist in New York for Barclays. “Production is picking up, and that is a key reason why we think growth will be stronger in the first quarter. Underlying all this is a pretty steady pace of consumer spending. Auto sales and housing are quite solid right now. The economy can withstand some fiscal tightening without going into recession.”

Personal spending rose in January, even as incomes dropped by the most in 20 years, a report from the Commerce Department showed. Household purchases, which account for about 70 percent of the economy, climbed 0.2 percent after a 0.1 percent gain the prior month. Incomes slumped 3.6 percent, sending the saving rate down to the lowest level since November 2007.

The pickup at U.S. factories comes as the rest of the world’s producers struggle to rebound. Two Chinese manufacturing indexes showed a slower-than-estimated pace of expansion in February. In Britain, manufacturing unexpectedly shrank last month as orders plunged. Factories in the euro region contracted for a 19th straight month.

Investment in new equipment is at the root of the recent pickup in increased activity on factory floors. Orders for capital goods, excluding military gear and aircraft, have climbed 9.5 percent since October, the biggest three-month gain since 1993, according to Commerce Department figures released earlier this week.

Applied Materials, the largest producer of chipmaking equipment, forecast fiscal second-quarter sales that beat most estimates, indicating that some customers are expanding output on brisk demand for mobile devices.

“The momentum in the business is strong,” Michael Splinter, chief executive officer at the Santa Clara, Calif.-based company, said at a conference the following day. “Our display business is starting to come back. Orders are picking up there as well.”

At the same time, the expiration of the payroll tax cut in January, coupled with climbing gasoline prices, is trimming discretionary income and may limit the gains in household purchases in the first quarter.

“It’s going to be touch and go for the consumer for the next few months,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pa., who correctly projected the 3.6 percent drop in income. “The consumer is going to be able to support the recovery, but they’re not going to be able to take it” to a higher level, he said.

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