U.S. factories received a surge of new orders in July, helping them
expand at the fastest pace in two years.
The Institute for Supply Management said Thursday its index of factory activity jumped to 54.4 in July, up from 50 in June. A reading above 50 indicates growth in manufacturing, according to the trade group that represents purchasing managers.
A gauge of production soared 11.6 points to 65, the highest reading since May 2004. A measure of hiring at factories rose to its best level in a year and was the latest of several encouraging signs ahead of Friday's July employment report.
Strong growth at U.S. factories could aid a sluggish economy, which has registered tepid growth over the past three fiscal quarters. It also could support a job market that has begun to accelerate but which has added mostly lower-paying service jobs.
Still, the ISM index isn't an indicator of major job growth, said Nick Hayes, a partner with FiveTwelve Group Ltd., a business research and consulting firm in Milwaukee.
"I can never get too excited about one month, although the trend is generally on the upswing," Hayes said. "We have got to figure out a way to tackle the jobs issue, all the way around, and it's not going to happen from this index. I don't see how one month of 'happy' is going to have companies hiring."
Businesses are placing more orders that are likely to be filled in the next few months. Steady gains in new home sales and construction are supporting strong growth in industries such as wood products, furniture, electrical equipment and appliances, according to economists.
Healthy auto sales also are buoying growth in the production of metal and components.
The ISM index is a sign of optimism, although manufacturing company executives aren't necessarily that enthusiastic or confident about growth, said Tim Hanley, the Milwaukee-based U.S. process and industrial products leader for Deloitte Touche Tohmatsu Ltd.
"I think there still continues to be an underlying layer of caution. The people I am talking with view the U.S. economy as being fairly solid, but not to the extent of a 10% increase" in the ISM index, Hanley said.
Job gains experienced in past economic recoveries may never be realized, Hanley said.
"What manufacturers have done, largely with smart investments over the last five years, is to really increase productivity. So as orders go up, that rarely translates into significant hiring," he said.
Still, some companies say there's a shortage of help in certain skilled trades.
"I was with a company (Thursday) morning that talked about what they're going to do in a few years when the people they have now, age 55, retire and take their skills with them," Hayes said.
Manufacturing struggled in the first few months of the year, held back by weaker global growth and steep government spending cuts. Slower production led factories to slash jobs from March through June.
But some of the trends have started to reverse, according to economists, partly from Europe's economies showing signs of life in recent months.
"We are cautiously optimistic that things are picking up a bit," said Eric Richter, managing director with North Star Asset Management in Menasha.
Richter said entire industries aren't necessarily booming, but there are examples of companies that are doing very well in different sectors.
The improved outlook may drive some factory expansions and capital spending, especially if it boosts productivity. Low interest rates could help some, too.
But companies have learned that they should not add a lot of new workers, or pursue major spending, until there's real demand and they can look into the future and see the demand is sustainable, Richter said.
The Associated Press contributed to this report.
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