ISM Manufacturing Rises in December

The ISM Manufacturing Index was strong in December rising to 55.9 from the prior month’s 53.6 reading. Expectations within financial markets were for a more muted gain to 54.3. New Orders rose to 65.5 in December from 60.3 in November. On the inflationary front, prices paid rose to 61.5 against expectations of an increase to 57.2.

The final month of 2009 saw an improving sentiment within the U.S. manufacturing sector according to the ISM Manufacturing survey. At 55.9 for December, the index not only surpassed expectations of a rise to 54.3, but also posted its strongest reading since April 2006. The gains in the components were broad-based with new orders rising to 65.5 in December from 60.3 in November, marking its strongest reading since December 2004. Production rose to 61.8 from November’s 59.9, while the employment component increased to 52.0 from the prior month’s 50.8, marking the third-consecutive month in expansionary territory.

Today’s reported rise in the ISM Manufacturing index for December is consistent with our forecast that U.S. GDP growth accelerated in the fourth quarter from the third quarter’s 2.2% annualized pace. Manufacturing strength is consistent with more of an add to growth in the fourth quarter, while strength in the housing sector implies that residential investment will also make a positive contribution to GDP.

Although we currently see upside risk to our forecast of 2.6% annualized fourth quarter growth, weakness in labour markets leaves the unemployment rate at a high level. We expect the Fed to help both sustain the recovery and heal labour markets by leaving the Fed Funds rate at its current low level until the final quarter of 2010.

Construction: In another report out this morning, construction spending in November declined 0.6% month-over-month posting a slightly worse reading than the 0.5% decline expected. Private residential construction posed a 1.6% month-over-month decline, although October’s figure was revised up to 4.8% month-over-month from the initially reported 4.4%. The earlier gain is likely sufficiently strong that we continue to expect private residential investments to make a positive contribution to fourth quarter GDP despite today’s report.

RBC Financial Group
http://www.rbc.com

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.