Ahead of the Bell:
ISM manufacturing index

[November 01, 2011]  WASHINGTON (AP) -- The manufacturing sector has been a key source of growth since the recession officially ended and it likely expanded again in October.

Economists forecast that the Institute for Supply Management's manufacturing index rose slightly last month to 52 from 51.6 in September. Readings above 50 indicate expansion.

The private trade group of purchasing managers will release the report at 10 a.m. Eastern on Tuesday.

The index hit a two-year low of 50.6 in August, contributing to fears that the economy was at risk of slipping into recession. The gain in September was among data that helped calm those worries. Last week, the government said that the economy expanded at an annual pace of 2.5 percent in the July-September quarter, the best quarterly growth in a year.

Manufacturing has grown for 26 straight months, according to the index. Factories were among the first businesses to start growing after the recession officially ended in June 2009.

However, factory activity slowed this spring. Consumers cut back on purchases in the face of higher prices for gas and food. And the March earthquake in Japan disrupted supply chains, which slowed U.S. auto production.

Factory output has picked up since then. Businesses are buying more industrial machinery and heavy equipment. Business spending on equipment and software was a key driver of growth in the third quarter.

Consumers are spending more, too. A key reason for the strong growth over the summer was that consumers stepped up their spending at a 2.4 percent at an annual rate -- nearly triple the growth from spring.

Much of that spending was on big-ticket items, such as appliances and electronic goods.

Auto sales are also rising, providing another lift to manufacturers. Sales picked up in September as the disruptions faded. Economists expect a modest increase in October.

Still, the economy isn't growing fast enough to lower the unemployment rate, which has been near 9 percent for more than two years. Growth needs to nearly double the 2.5 percent pace from this summer to have a significant impact.

Economists doubt consumers can keep spending like they did this summer without earning more. For that to happen, employers need to step up hiring.

In recent months, job growth has stagnated. Employers have added an average of only 72,000 jobs per month in the past five months. That's far below the 100,000 per month needed to keep up with population growth. And it's down from an average of 180,000 in the first four months of this year.

Employers added only 103,000 jobs in September. The unemployment rate stayed at 9.1 percent for a third straight month.

The government releases the October employment report Friday. Economists forecast that employers added 100,000 jobs last month and unemployment remained stuck at 9.1 percent.

The ISM is a trade group of purchasing managers based in Tempe, Ariz. It compiles its manufacturing index by surveying about 300 purchasing managers across the country.

[Associated Press]

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