NEW YORK (CNN/Money) -
U.S. manufacturing grew at the fastest pace in 20 years in December, the nation's purchasing managers said Friday, beating Wall Street forecasts for a slowdown in growth and raising hopes for a pickup in hiring in the new year.
The Institute for Supply Management (ISM) said its index of manufacturing activity jumped to 66.2 from 62.8 in November. Economists, on average, expected an ISM index of 61, according to Briefing.com.
The index was the highest since 69.9 in December 1983 and has been above 50, a number that indicates expansion in the sector, for six straight months.
"It's nothing short of incredible. It's not enough to send me scurrying to raise my forecast for next year, but it's pointing toward considerable momentum going into the new year," said David Resler, chief economist at Nomura Securities. "It gives me more confidence we're going to be able to maintain strong growth in the first half."
On Wall Street, blue-chip stocks rose initially after the report but later fell back to end lower in the first session of the new year. Treasury bond prices tumbled on the news, pushing yields higher, as investors worried the report might presage higher inflation down the road.
The economy grew at a blistering 8.2 percent pace in the third quarter -- the strongest growth in 20 years -- driven by consumers flush with cash from tax rebate checks and a wave of cash-out mortgage refinancing.
Economists hope the surge will force businesses to hire new workers to keep up with rising demand, helping to keep the economy growing, though they admit that growth will almost certainly slow from the third quarter.
The ISM's employment index rose to 55.5 from 51 in November, marking the second straight month above 50, following 37 months below that mark. That raises the chances that December saw the first gain in manufacturing payrolls since July 2000. The Labor Department is scheduled to release its figures for December employment next Friday.
"One significant question mark was whether the recovery in manufacturing would be strong enough to generate the employment needed to sustain economic expansion," Resler said. "[Friday's report] is a strong indication we're finally getting that employment growth."
But the ISM employment index grew in November, as well, without resulting in any U.S. manufacturing jobs. Manufacturing payrolls are still 2.8 million jobs thinner than they were in July 2000, according to the Labor Department, and many of those jobs are probably never coming back.
Some economists believe structural changes in the economy -- including technological improvements and a desire to hire workers overseas, where labor is cheaper -- will keep manufacturing job growth muted, even when production is strong.
"Manufacturing sector employment is likely to improve in the months ahead," said Wachovia chief economist John Silvia. "However, employment gains are likely to remain below par."
ISM's new orders index jumped to 77.6, the highest level since 80.3 in July 1950, from 73.7 in November. Strength in new orders indicates the manufacturing sector's growth can continue past December, though few economists expect it to continue at such lofty levels.
The group's export orders index rose to 60.4 from 57.9, with sectors as diverse as furniture, primary metals, industrial and commercial equipment and chemicals contributing.
"Normally there is a lag between a currency starting to weaken and export growth starting, and we are finally starting to see the results of the lower U.S. dollar," Tom Duesterberg, president of Tempe, Ariz.-based ISM, told Reuters.
With business confidence up, "we expect more robust capital investment this year" in the form of new productive capacity and hiring, Duesterberg said. The purchasing managers in ISM buy everything from cardboard to computer chips for about 300 of the nation's biggest companies.
The inventories index, however, fell to 47.3 from 50 in November. Many businesses, surprised by the strength in demand in the third quarter, cleared their inventories of goods, and many economists hoped they would restock their shelves in the fourth quarter. So far, however, that process has been spotty.
The prices index rose to 66 from 64 in November, the 22nd straight gain, as manufacturers continue to pay higher prices than consumers. A key measure of consumer inflation watched closely by the Federal Reserve recently posted its slowest 12-month gain in history.
With consumer inflation so low, the Fed has been able to keep its key short-term interest rate at a 40-year low, despite growing fear among some analysts that inflation may be right around the corner.
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