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Manufacturing index rises
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January 2, 2002: 11:14 a.m. ET
ISM index jumps dramatically in December, but sector still in recession.
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NEW YORK (CNN/Money) - The pace of manufacturing activity in the United States surged in December, the nation's purchasing managers said Wednesday, raising hopes of an end to a 17-month recession in the beleaguered sector.
The Institute of Supply Management, formerly the National Association of Purchasing Management, said its index of manufacturing activity rose to 48.2 in December from 44.5 in November. Economists surveyed by Briefing.com expected an ISM index of just 45.8.
The index has been below 50 -- indicating contraction in the sector -- for 17 straight months. But it has rebounded significantly from a 10-and-a-half-year low of 39.8 in October.
"While the manufacturing sector continues to decline, the rate of decline has slowed very quickly, giving some hope that recovery may come faster than is generally found in a major downturn," said Norbert Ore, chairman of the ISM's Manufacturing Business Survey Committee.
Manufacturing has borne the brunt of a prolonged slowdown in the U.S. economy, leading to more than a million job cuts in 2001. Aggressive business investment in new technology in the late 1990s led to over-production and an excess of unsold goods when the tech boom went bust in 2000. As businesses work off their excess inventory and demand recovers, manufacturers can increase production and hire workers.
And data in the ISM report indicated that process could be under way. The new orders index rose to 54.9 in December -- its highest level since April 2000 -- from 48.8 in November. Meanwhile, the inventories index fell to 37.7 from 37.9 in November.
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"Output will not immediately accelerate to the pace suggested by the orders numbers ... because companies are still aggressively running down inventory," Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd., said in a research report.
"Still, this is a hugely encouraging report, pointing clearly to a vigorous recovery," Shepherdson added.
The ISM report could also raise hopes about a recovery in the broader U.S. economy, since an index above 42.7 indicates growth there.
The United States has been in recession since March, according to the National Bureau of Economic Research. The technical definition of a recession -- two straight quarters of shrinking gross domestic product (GDP) -- hasn't yet been met, but GDP shrank in the third quarter and could do so again in the fourth.
To bolster consumer spending -- which fuels two-thirds of GDP -- the Federal Reserve cut its target for short-term interest rates 11 times in 2001 to levels not seen in 40 years.
But an abrupt rebound in consumer confidence, steady home sales and Wednesday's manufacturing report have led some optimistic economists to say the Fed's work may be done.
"No more easing [is] needed here," Shepherdson said.
Wall Street, on the other hand, seemed to ignore the positive implications of the data; stock prices fell in early trade, while U.S. Treasury bond prices also fell.
The ISM's manufacturing index is based on a survey of purchasing executives who buy the raw materials for manufacturing at about 400 companies. 
- from staff and wire reports
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