http://cbs.marketwatch.com/news/story.asp?guid=%7B2EA886B8%2DA455%2D4F4B%2DAED6%2D32994EAEA185%7D&siteid=mktw

U.S. factory activity red-hot
Nov ISM rises to 62.8%, best month since Dec 1983

By Gregory Robb, CBS Marketwatch.com
Last Update: 11:48 AM ET Dec. 1, 2003

WASHINGTON (CBS.MW) - Activity at U.S. factories was red-hot in November, the Institute for Supply Management said Monday.

The ISM manufacturing index rose to 62.8 percent last month from 57.0 percent in October.
This was the highest level since December 1983.

The new orders index rose to 73.7 percent in November from 64.3 percent in October, also the highest reading since December 1983.

The manufacturing sector is exhibiting "much more of a growth mentality across the board," said Norbert Ore, chair of the ISM
manufacturing survey committee and a purchasing manager with Georgia-Pacific Corp.

The report was stronger than expected. The consensus forecast of Wall Street economists was for the ISM index to rise to 57.9 percent.

Readings over 50 percent indicate that most manufacturing firms surveyed said business was getting better -- or at least, no worse.
The ISM index is considered one of the most reliable leading indicators for the factory sector and, by extension, the broader economy.

Stocks gained and bonds fell on the report, lifting a Fed-sensitive 2-year Treasury note to briefly revisit the 2003 high at 2.14 percent.
The strong ISM report in November had significant implications, economists said.

First, the report suggests above-trend economic growth in the next two quarters.
Secondly, economists said there is now "upside-risk" to the market consensus forecast of 141,000 new jobs added in November.

Building a case for rate hikes

And finally, the strong ISM report could push the Federal Reserve to remove the wording "considerable period" from the FOMC
statement - indicating that Fed rate hikes might not be too far off.

"This is all about a long period of very low interest rates, which have done their job well. The Fed now has to reverse course, and soon,"
said Ian Shepherdson, U.S. economist at High Frequency Economics.

Reversing 37 months of contraction, the ISM employment index was positive in November, rising to 51.0 percent from October's 47.7 percent.
Ore said the hiring improvement surprised him because he had anticipated a longer lag in employment even as the other components improved.

The production index rose to 68.3 percent in November from 62.6 percent in October, the highest since November 1983.

Ore said the increase in orders was the result of stronger demand, not just the need to replenish lean inventories.

The backlog of orders rose to 59.0 percent from 53.5 percent, while November's inventories rose to 50.0 percent from 44.5 percent.
Supplier deliveries rose to 56.0 percent from 53.9 percent, the Tempe, Ariz.-based ISM said.

Eighteen of 20 industries reported growth in November.
Prices paid rose to 64.0 percent from 58.5 percent.

Declining dollar helps

Ore said taken on the surface, the surge in prices might send up inflation warnings. But he said slack capacity must be taken into
account and was tempering the inflationary impact of rising prices.

The export sector cooled slightly in November, falling to 57.9 percent from 59.6 percent.

Still, Ore said the organization's membership has noted help from a declining dollar - 77 percent say they export the goods they
manufacture and so are impacted by the dollar, which is trading at an all-time low against the euro and a three-year low against the yen.

He said manufacturers are reporting new business abroad unseen "in quite some time."

Manufacturing is "much more competitive. This is a big issue."

Ore credited some of the improved attitudes among purchasing managers to post-Iraq war relief. That said, he added that ongoing
geopolitical tensions present an unknown risk to the industry, particularly if consumer confidence wanes.

In a separate report, the Commerce Department said construction spending rose 0.9 percent in October following a 1.3 percent gain in September.
 
 
 

Greg Robb is a senior reporter for CBS MarketWatch based in Washington.

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