Tags: Manufacturing | Construction | Economy | Growth

Solid Manufacturing, Construction Data May Push Fed Closer to Tapering

Tuesday, 03 Sep 2013 11:30 AM

Stronger-than-expected data on U.S. manufacturing and construction spending on Tuesday hinted the world's biggest economy was gaining traction, potentially adding to views that the Federal Reserve will soon slow its massive bond-buying program.

The U.S. manufacturing sector grew last month at its fastest pace in more than two years, with the Institute for Supply Management's (ISM) index of national factory activity rising to 55.7 in August from 55.4 the prior month.

That comfortably beat expectations for 54, with the index at its highest since June 2011.

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A reading above 50 indicates expansion in the sector.

"This was an unambiguously positive report, signaling a further acceleration in manufacturing momentum in August," said Millan Mulraine, director of U.S. research and strategy at TD Securities in New York.

New orders also marked their best level in more than two years, with that sub-index jumping to 63.2 from 58.3. Employment, however, slipped to 53.3 from 54.4.

Jobs data are especially important to the Fed, which wants to see the unemployment rate closer to 6.5 percent from its current 7.4 percent.

U.S. construction spending rose in July, too, climbing 0.6 percent to an annual rate of $901 billion, the Commerce Department said. The growth rate was above the median forecast in a Reuters poll of analysts.

In addition, demand picked up in the U.S. manufacturing sector in August, a separate report showed.

Financial data firm Markit said that while its final U.S. Manufacturing Purchasing Managers Index eased to 53.1 from July's reading of 53.7, a pickup in new orders and a drop in inventories pointed to faster growth ahead.

"At the same time, inventories of finished goods showed the largest fall since 2009 as some companies reported that demand often exceeded production," said Markit chief economist Chris Williamson. "Factories will need to ramp up production to replace depleted inventories given this order book growth."

Faster global growth could help persuade policymakers at the U.S. Federal Reserve to slow their massive bond purchase program soon.

The bank is now buying $85 billion per month in Treasuries and mortgage-backed securities, but policymakers have hinted at exiting from the strategy as the U.S. economy grows strong enough to stand on its own.

A more vigorous U.S. economy could nudge the Fed closer to a pullback as soon as its next meeting on Sept. 17-18.

But with U.S. data still often painting a mixed picture, that potential September exit could yet change.

Investors are awaiting the August nonfarm payrolls report, due on Friday, for more clarity on the health of the U.S. jobs market.

Other data on Tuesday and earlier in the week also pointed to more robust global growth.

In China, domestic demand helped the services sector grow steadily in August, suggesting government measures have started to steer Asia's biggest economy out of its longest slowdown.

European factory data also pointed to growth in August, including faster-than-expected manufacturing growth in Britain.

The survey was especially welcome after a long economic stagnation in the U.K., which earlier this year flirted with a triple-dip recession.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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