U.S. Growth in Manufacturing Sector Strengthened in January 2012; Construction Spending Beat Expectations in December 2011

• The ISM manufacturing index rose to 54.1 in January 2012. This is its highest level since June 2011, although it was slightly below market expectations for an increase to 54.5.
• The "new orders", "supplier deliveries", and "inventories" components all rose, while the "production" and "employment" components fell; however, all components except inventories remained in expansion territory.
• In a separate report, construction spending rose a stronger than expected 1.5% in December 2011.

The US manufacturing sector expanded for the thirtieth consecutive month in January 2012, and the pace of growth accelerated as indicated by the ISM manufacturing index rising to 54.1 from 53.1 in December 2011 (initially reported as 53.9). This leaves the index at its highest level in seven months. The Market expected a slightly larger increase to 54.5.

Gains in the ISM index in January were due to increases in the "new orders", "supplier deliveries", and "inventories" components. The new orders index increased by 2.8 points to 57.6, which is its highest level since April 2011. The supplier deliveries component rose to 53.6 in January from 51.5 in December, indicating that manufacturers are seeing a slower pace of delivery (when the economy is growing, delivery times tend to become slower due to increasing demand). Inventories continued to fall in the month, although at a much slower pace than in December: the inventories index was 49.5 in January compared to 45.5 last month. Although this weighs on the overall index, it could imply that strong demand is being supplied to inventories rather than new production. The "production" and "employment" indices both fell but remained in expansion territory, indicating that these components continued to grow but at a slower pace than previously. The production index fell to 55.7 from 58.9 last month, while the employment component fell only slightly to 54.3 from 54.8. Inflationary pressures appear to be picking up, with the "prices paid" component rising to 55.5 from 47.5, its first reading over 50 since September 2011.

The Institute for Supply Management (ISM) also released its annual revisions to historical data this week. Based on a recommendation from the Department of Commerce, this year's revisions cover a period of seven years instead of the usual four. The revisions show only minor changes, with the overall pattern of the index remaining essentially unchanged. Details of the revisions are available on the ISM website.

Today's ISM manufacturing report indicated that the manufacturing industry continued to expand in the first month of 2012. The details of the report were encouraging, showing that all components expect inventories remained in expansion territory. This sets the stage for the fourth-quarter 2011's solid increase in goods production to continue into this year and bodes well for overall GDP growth to rise an annualized 2.8% in the first quarter of 2012. This would be unchanged from the current estimate for the previous quarter, although the construction data imply a possible 0.1 percentage point upward revision to the fourth-quarter 2011 rate.

In a separate release this morning, construction spending in the US rose 1.5% in December 2011, beating market expectations for a 0.5% increase. This represents an acceleration from November's 0.4% pace of growth (initially reported as 1.2%). The strength in December was seen in both the private and public sectors with construction spending up 2.1% and 0.5%, respectively in the month. Spending on non-residential construction showed a particularly rapid increase up 1.9% in the month. This leaves non-residential construction at its highest level since December 2009. Residential construction rose by a slower 0.8% after posting a -0.3% contraction in November (initially reported as 1.8%).