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Manufacturing may help fight off new U.S. recession

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U.S. factories grew more quickly in September as production and hiring increased, suggesting that manufacturing would help keep the economy from slipping into a new recession.

Other data Monday offered more good news for the troubled U.S. economy, with strong demand for new motor vehicles putting sales on track to surpass August's rate, and construction spending unexpectedly rebounding in August.

"That hardly sounds like an economy flat on its back. The economy is still moving forward. But no one should confuse direction with speed," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

September marked the 26th straight month of expansion in a sector that has shouldered the broader economic recovery, and the factory report implied that an outright contraction in output would probably be avoided.

The Institute for Supply Management said its index of national factory activity rose to 51.6 last month from 50.6 in August, boosted by a rebound in production and increased factory hiring. But new orders fell for third month.

Economists had expected the index to edge down to 50.5. A reading above 50 indicates expansion in manufacturing.

The data was eclipsed in financial markets by Greece's admission that it would miss its deficit target this year, which weighed on stocks worldwide. Prices of U.S. Treasury debt rallied, while the dollar rose against a basket of currencies.

Europe's worsening debt crisis has left the U.S. economy on the edge of a new downturn. The economy grew at a 1.3 percent annualized rate in the second quarter, an improvement from the 0.4 percent in the January-March period.

The growth in U.S. manufacturing is bucking a global trend. Factory activity in Europe and Asia slumped in September to levels not seen since the depths of the financial crisis as export demand dropped.

The Global Manufacturing PMI, compiled by JPMorgan with research and supply organizations, contracted for the first time in over two years.

VEHICLE SALES, CONSTRUCTION SPENDING STRONG

The Federal Reserve last month announced a new measure designed to push long-term borrowing costs lower by shifting assets on its balance sheet to help the tentative economy.

Last week, Fed Chairman Ben Bernanke said the U.S. central bank might need to ease monetary policy further if inflation or inflation expectations fell significantly.

For now, indications are that the economy will avoid a recession and remain on a slow growth track, even as weak incomes constrain consumer spending -- the main engine of growth.

But households were more willing to spend on motor vehicles last month. Reports so far from General Motors , Chrysler and Volkswagen suggest sales could be about 8 percent higher than August's on a seasonally adjusted annualized basis.

A separate report from the Commerce Department showed an unexpected rebounded in construction spending in August as outlays on state and local government building projects rose sharply.

Construction spending rose 1.4 percent to an annual rate of $799.15 billion, the Commerce Department said. Economists had forecast a 0.3 percent drop.

"Spending should rise in the third quarter as a result of post-(Hurricane) Irene repairs. Construction is set to add to GDP growth in third and fourth quarter but the sector is still very weak," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

Spending on non-residential structures rose in the second quarter at its quickest pace since the third quarter of 2007.

Data last week showed that cash-rich U.S. businesses continued to invest in machinery, a trend that economists expect to hold and keep the economy expanding.

Manufacturing accounts for about 12 percent of gross domestic product and almost 11 percent of nonfarm employment.

The tenor of the ISM manufacturing report was strengthened by an increase in hiring last month, which could be a good omen for Friday's employment report.

The economy failed to add jobs in August, leaving the unemployment rate at a lofty 9.1 percent.

Other details of the factories survey showed production rebounded last month after contracting in August. However, new orders contracted for a third straight month, potentially pointing to a pullback in manufacturing in the months ahead.

"The main concern going forward would be if new orders didn't pick up," said Bradley J. Holcomb, chair of the ISM manufacturing business survey committee in Dallas, Texas.

But inventories are growing at a slower pace and the ISM viewed customers' supplies as too low, which should boost future orders. In addition, orders for exports rose and suppliers are taking a little bit longer to make deliveries to manufacturers, which is also a good sign.

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