WASHINGTON – Factories are cranking up production, anticipating greater spending by consumers and businesses in 2011. Tax cuts will give people more money to buy cars, computers and electronic goods, and provide incentives for businesses to invest in equipment.
Manufacturing activity has expanded in every month since the recession ended a year and a half ago. The big difference now is that the growth is being driven by higher sales and more confident consumers — not just businesses rebuilding the stockpiles that they slashed during the recession.
Steady hiring is likely to follow. Economists caution that it will only be enough to chip away at the 9.8 percent unemployment rate this year. Still, they expect it will give the economy a shot of momentum, putting more money into people's pockets and encouraging them to spend more freely. And that will lead to more hiring in other areas of the economy.
"You're in a situation where a virtuous cycle is beginning to materialize," said Eric Green, chief economist at TD Securities.
The latest sign came Monday when the Institute for Supply Management said the manufacturing sector expanded for the 17th straight month in December. The trade group of purchasing managers said its index of manufacturing business activity rose to 57 last month, a seven-month high. Any reading over 50 indicates growth. That is well above the recession's low of 32.5, hit in December 2008. But it's below the reading of 60.4 in April, the highest level since June 2004.
New orders rose to the highest level since May and production jumped, according to the report. The ISM surveys purchasing managers at about 350 companies around the country to compile the index.
A separate report Monday showed that construction spending rose in November for the third straight month. Builders began work on more homes and the government boosted its investment in construction projects to lift spending to $810.2 billion, the Commerce Department said. Still, that's only 2.3 percent above August's figure, which was the lowest level in a decade.
Better news on the economy gave stocks a lift on the first day of trading in the new year. The Dow Jones industrial average closed up more than 93 points,
Companies are sitting on nearly $2 trillion in cash. Many are expected to use some of that money to keep upgrading their plants and computer systems. Business investment in new equipment was a steady source of economic growth last year.
The tax package signed by President Barack Obama last month should encourage greater business investment, said Daniel Meckstroth, chief economist at Manufacturers' Alliance/MAPI. It includes a provision that will allow companies to write-off the entire cost of big-ticket purchases.
Meckstroth estimates that manufacturing output will increase by 4 percent in 2011. While that's below last year's pace of 6 percent growth, much of 2010's gain was simply due to companies restocking their warehouses and store shelves.
Consumer spending is also rising at a healthy clip. Holiday shoppers spent at the fastest pace since 2006, according to private-sector reports. And most Americans will see their take-home pay increase in 2011 because of a cut in payroll taxes.
Manufacturers are also benefiting from stronger demand overseas, particularly in large developing countries. China, Brazil and India are among those nations recovering at a faster pace than developed regions, such as Europe and Japan.
A survey of Chinese manufacturers last week showed that the nation's boom lost a bit of momentum last month. The state-affiliated China Federation of Logistics and Purchasing said that its index dipped in November, the first decline in five months. Still, the number indicates China's factories are increasing output.
Chinese authorities are struggling to keep prices in check by raising interest rates. It increased a key rate for the second time in three months on Dec. 25. China's inflation surged to 5.1 percent in November, the highest in more than two years.
As part of its efforts to rein in higher prices, China may let its currency, the yuan, rise against the dollar this year. That would lower the price of imports, and would make U.S. exports cheaper in China, potentially boosting sales.
In the U.S., export orders are still growing, the ISM said, but at a slower pace.
Exports should grow faster than imports in the U.S. this year. That's another switch from 2010, economists said, when rising imports were a drag on the U.S. economy. This year, the faster growth of exports should benefit manufacturing and the broader economy.
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