New York, NY, Feb. 4—For the third straight month, the nation's manufacturing sector grew, though at a slower pace, as worries about a war with Iraq dampened optimism.
The Institute of Supply Management's manufacturing activity index came in at 53.9 in January, below December's revised 55.2 but above analysts' expectations of 53 for the month. The above 50 reading indicates the sector is still growing. Most market watchers had expected a decline in the January ISM because December's figure was so high.
“This was a very good report,” said Joel L. Naroff, president and chief economist of Naroff Economic Advisors. “It adds to the belief that the economy is fundamentally in good shape but is being held back by the geopolitical uncertainties.”
Some economists suggested the latest manufacturing report signals the industry is on the mend.
The ISM index, closely followed because it gives an early reading on the health of the manufacturing sector, is based on a survey of purchasing managers at more than 400 industrial companies.
Norbert Ore, who oversees the ISM survey, called it “cause for optimism for an improving economy in the first quarter.”
He noted continuing strength in two key areas, new orders and production. The ISM's New Orders Index stood at 59.7, well above 50 but down 3.2 points from December. The Production Index posted its 14th consecutive month of growth, coming in at 56.3 in January. However, it was down 0.3 points from December.
Manufacturers' backlog of orders declined for the seventh straight month, but new exports orders grew for the 13th consecutive time, the ISM report found.
Still, Kurt Karl, chief U.S. economist for Swiss Re in New York, said manufacturing accounts for only 20% of total output and that its spotty performance wouldn't necessarily derail an economic recovery.
Aside from war concerns, manufacturers are focused on the bottom line. “Profits have gone up, but they're still very low by historical standards,” Karl said. “It's been a bloodbath. As a consequence, they are still very cost conscious.”
As a result, manufacturers continue to hold back on hiring. The ISM's Employment Index fell to 47.6 in January and remained below 50 for the 28th straight month, indicating contraction.
“In spite of the seeming pickup in activity, there is no indication that hiring is coming back as few firms reported adding workers,” Naroff said.
