The nation's manufacturing sector has expanded this year at the fastest pace in a quarter-century, boosted by a weak dollar that has made U.S. goods cheap overseas.
Strong factory production could help the economy rebound after experiencing weak growth in the first three months of this year. But the construction industry is struggling and manufacturing won't drive enough job growth by itself. Rising prices are also threatening many companies' profit margins.
The Institute for Supply Management said Monday that manufacturing activity expanded in April for the 21st straight month. While the trade group's index dipped to 60.4, it's down only slightly from the previous two months. And February's reading of 61.4 was the fastest expansion in nearly seven years. Any reading above 50 signals growth.
"In April, there was no meaningful slowdown in what has become the most important sector in the economy," said Dan Greenhaus, economic strategist at Miller Tabak.
The index has topped 60 in every month this year, the best four-month stretch in 27 years, said David Resler, an economist at Nomura Securities.
Companies are buying more industrial machinery, heavy equipment, and computers, spurring much of the growth in factory output. And consumers are buying more cars, helping the beleaguered U.S. auto industry recover after General Motors and Chrysler declared bankruptcy two years ago.
Another reason for the growth is the falling dollar. It has declined 8 percent in value this year against a basket of six other currencies. That helped fuel a 7.8 percent rise in exports in the first three months of this year. A weaker dollar makes U.S. goods cheaper overseas, and imports more expensive in the U.S.
The manufacturing sector has expanded in every month but one since the recession ended in June 2009. Still, it represents only about 11 percent of U.S. economic activity and can only do so much to lift the broader economy.
Paul Ashworth, an economist at Capital Economics, said the manufacturing index is at levels that are historically consistent with economic growth at about 5 percent. But growth is likely to be much weaker than that because of subpar activity in other areas.
The home-building industry is on pace to suffer the worst two years for new-home sales since the government began keeping records in 1963. The service sector is recovering at a sluggish pace. Consumers are spending more after getting a cut in Social Security payroll taxes, but most of the extra money is going toward higher priced gas and food.
"That just shows you the gap between manufacturing and the rest of the economy," Ashworth said.
Builders did break ground on more hotels, office buildings and factories in March, lifting U.S. construction spending for the first time in four months. The increase is partly a bounce-back from weather-related declines in January and February.
Still, even with the gain, construction spending stood at a seasonally adjusted annual rate $786.9 billion — just half the $1.5 trillion pace that economists view as healthy. Many economists say it could take four years for construction to fully recover.
Economists expect construction will add to economic growth in the April-June quarter after subtracting from it in the January-March period. The gains should help growth rebound to roughly 3 percent this quarter, an improvement from the 1.8 percent growth rate in the first quarter.
Manufacturing companies have been reporting healthy earnings gains in recent weeks. Chrysler on Monday reported its first quarterly profit in five years. And Ford Motor Co. said last week that it earned its biggest first-quarter profit in 13 years.
Heavy equipment maker Caterpillar said Friday that profit in the January-March quarter rose five-fold. Demand for its mining and construction equipment soared, more evidence of the growth in U.S. exports. Construction equipment and other U.S.-made goods are in high demand in developing countries such as China, Brazil and India.
A major reason for the weak dollar is the Federal Reserve has kept short-term interest rates at record low levels near zero. Other central banks overseas have begun to increase interest rates to ward off inflation, which makes their currencies more attractive to investors seeking higher returns.
U.S. companies are coping with a steep rise in commodity prices. The survey's prices paid index rose to the highest level in nearly three years. Aluminum, chemicals, corn, oil, plastics and steel were all reported to be more expensive than the previous month.
Many companies are hesitant to pass along the added costs to the consumer, who is coping with 8.8 percent unemployment and slow job growth. Instead, the higher prices are squeezing profit margins. One company in the food processing industry said that higher raw material costs are "putting extreme pressure on profits," according to the trade group's report.
Separate measures of new orders and production both topped 60 for the fifth straight month, though they both declined in April compared to March. The employment index also dipped but showed that manufacturers are still adding jobs. The employment index has risen in the past four months at the fastest pace in 38 years.
Norbert Ore, chairman of the ISM's survey committee, said there was little sign of any impact from the huge earthquake and tsunami in Japan on March 11. Some companies said electronic components, many of which are manufactured in Japan, were in short supply in April, but Ore said that concern existed before the disaster.
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