Manufacturing gets back on track

NEW YORK (CNNMoney.com) -- Manufacturing resumed its growth in December according to the latest survey of executives in the sector, a month after the closely watched reading showed a retreat in manufacturing for the first time in more than three years.

The Institute of Supply Management manufacturing index came in at 51.4 in December, up from 49.5 in the November report. Economists surveyed by Briefing.com had forecast that the reading would come in at 50, which is the tipping point between pointing to growth and pointing to a contraction in the sector.

The November reading was the first below 50 after 41 straight months of growth.

The sub-index reading for new orders showed even more improvement, rising to a reading of 52.1 from 48.7 in November. And the production reading also returned to growth, rising to 51.8 from 48.5 the month earlier. Both of those readings in November had broken strings of positive readings.

"Manufacturing proved resilient in December," said a statement from Norbert Ore, chair of the ISM's manufacturing business survey committee. He said the survey found strong demand for fourth-quarter shipments from the computer and electronic products sector, and that fabricated metals producers reported automotive customer demand is picking up after being flat to lower the last few months.

Outside economists said that despite rising above the 50 tipping point between growth and contraction, the latest reading did show weakness.

"While manufacturing is hardly out of the woods, neither does it look like it is getting further lost," said Robert Brusca of FAO Economics.

Gus Faucher, director of macroeconomics for Moody's Economy.com, said even with the overall strength in the ISM report, it's clear that there's still weakness, with customers having too much inventory and the backlog of orders decreasing.

"Right now we're dealing with manufacturing that is roughly flat," he said. "It isn't subtracting much from [overall economic] growth, but it's not adding much either."

The best news from the survey might have been the sharp drop in the prices paid component. The survey found that 24 percent of those surveyed reported paying lower prices in December for raw materials, up from 16 percent in November, and those paying higher prices fell to 19 percent from 23 percent a month earlier.

The inflation reading could help the case of those arguing that the Federal Reserve should cut interest rates at some point early this year in order to spur what is expected to be a slowing economy. The Fed would be unlikely to cut rates if it saw inflation pressures rising. But the stronger-than-expected report on manufacturing would suggest that a rate cut isn't needed at this time.

Still other signs have pointed to weakness in some key areas of manufacturing, particularly among the nation's battered automakers and home builders.

General Motors (Charts), Ford Motor (Charts) and the Chrysler Group of DaimlerChrysler (Charts) all reported a sharp drop in market share, while Asian automakers posted gains.

Despite overall signs of growth, the December ISM survey also found that furniture and related industries are projecting a 10 percent drop in production through the first half of next year, as the sector has been hit by a slump in home building and real estate.

Automakers, home builders and related industries weren't the only ones having trouble in recent reports.

Aluminum maker Alcoa (Charts), a Dow component, was hit by a two-month strike at its Cleveland plant, and lower-than-expected earnings. And recent reports from the Federal Reserve banks in Philadelphia and Dallas have also pointed to greater-than-expected manufacturing weakness in those markets.

A separate government report Tuesday showed construction spending down 0.2 percent in November, although that was better than the forecast for a 0.6 percent decline. The October drop in construction spending was also revised to show only a 0.3 percent decline, rather than the 1 percent slide originally reported.

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