WASHINGTON (AP) -- US factory activity expanded last month at the fastest pace in 2 ½ years, an encouraging sign that manufacturing could lift economic growth and hiring in the coming months.
The Institute for Supply Management, a trade group of purchasing managers, said Tuesday that its manufacturing index rose in September to 56.2, the highest since April 2011. That's up from 55.7 in August and the fourth straight increase in the index. A reading above 50 indicates growth.
Manufacturers added jobs last month at the fastest pace in more than a year and ramped up production. They also received new orders at a healthy pace, though slower than in August.
U.S. factories are showing signs of picking up after slumping earlier this year. A modest recovery in housing and strong auto sales are pushing up demand for steel and other metals, auto parts, furniture and appliances.
Factories had been hampered by weak growth overseas that lowered demand for U.S. goods. But exports grew last month, though at a slower pace than August. Europe's economy is slowly recovering after an 18-month recession and Japan is also growing faster after two decades of stagnation.
The economy expanded at a 2.5 percent annual pace in the April-June quarter, up from a 1.1 percent annual rate from January through March. Many economists believe growth slowed in the July-September quarter to a 2 percent pace or below. But the gains in manufacturing could set the stage for stronger growth in the October-December quarter.
Earlier this month, the Federal Reserve said manufacturers boosted their output in August by the most in eight years. The gains were driven by a robust month at auto plants.
Still, companies placed only slightly more orders for long-lasting manufactured goods in August after a sharp fall in July. Demand was held back by fewer orders for defense aircraft and other military goods, the Commerce Department said last week. That could be related to steep government spending cuts that took effect in March. Excluding defense spending, orders rose 0.5 percent.
And demand for so-called core capital goods rose 1.5 percent, after falling 3.3 percent the previous month. Core capital goods are a good measure of businesses' confidence in the economy and include items that point to expansion, such as machinery and computers.
But the gains weren't enough to reverse the declines in previous months.
Cliff Waldman, senior economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), offered up the following analysis of the recent numbers:
“The September manufacturing report from the Institute for Supply Management (ISM) adds to growing evidence that the muted recovery in global economic activity is benefitting U.S. manufacturing growth and helping the factory sector to recover from the shallow output contraction that it suffered in the spring of this year. After essentially sitting right at the 50 percent mark, which delineates manufacturing growth from manufacturing contraction, in May and June, the Index has risen steadily to a strong 56.2 percent in September. The index components which reflect new orders and production activity remain robust. The employment component suggests a hint of optimism about the short-term prospects for factory sector job gains.
“While encouraging, recent ISM manufacturing reports have been somewhat overstating the growth in factory sector output” he cautioned. “Output growth data suggest a positive but at best moderate short-term trajectory. Challenges remain in a global economy still struggling to find its balance in the wake of years of crisis and weakness. Further, domestic policy uncertainty continues to be a decidedly negative influence on business equipment investment, an important demand driver for U.S factories.
“The outlook for U.S manufacturing remains one of moderate but strengthening activity for the balance of this year and into 2014 and 2015,” Waldman concluded. “Nonetheless, the negative surprises that could still be delivered by an economically and politically complex global picture, as well as a troubled U.S. policy dynamic, should not be discounted.”