WASHINGTON -- The U.S. manufacturing sector expanded in June for the first time in a year as new orders surged to their highest level since the summer of 1988, purchasing managers reported yesterday.
The index of the National Association of Purchasing Management jumped to 50.9% from 45.4% in May for the fifth consecutive monthly advance. The index is based on a survey of over 300 industrial firms throughout the United States.
By climbing over 50%, the index signaled that the industrial sector was expanding again after 12 consecutive monthly declines. The last time the ndex was above 50% was in May of last year, a few months before the onset of the recession.
"The recession is essentially over for the manufacturing sector as well as the overall economy," said Robert Bretz, chairman of the committee that surveyed purchasing managers to get the latest monthly report. "This recession was shorter and less severe than the previous recession," he added.
The view that the economy is recovering gained ground with Friday's report by the Commerce Department showing that the index of leading economic indicators in May advanced for the fourth month in a row. Other economic reports released last week by the government were also favorable, leading the Bush administration to proclaim that recovery is underway.
The rise in the purchasing managers' index reflected broad gains in a number of components and was greater than financial markets were expecting. "I don't think there's any question the economy is on the plus side," said Leonard Santow, managing director of Griggs & Santow Inc. "The only question is how far on the plus side do we go for the rest of the year."
The new orders index, which many economists use as a barometer of future production, shot up to 59.1% from 50.6% in May for the biggest monthly advance since February 1983. The increase also marked the highest level of orders since August 1988.
In addition, evidence that factory output is turning around came in the production index. That index shot up 55.0% from 48.8% in May, ending 10 consecutive monthly declines.
Other components were also up. The index for new exports orders swelled to 55.0% from 53.0%, indicating the dollar's rise in foreign exchange markets was still not preventing gains in overseas sales. In fact, the index for imports fell slightly to 47.5% from 48.0%, continuing a decline that began over a year ago.
The strength reflected in the purchasing manager's report added to the market's expectations that Federal Reserve policymakers will refrain from altering short-term rates. "That's a foregone conclusion," said Mr. Shantow. "The market isn't even thinking about that at this point." The Federal Open Market Committee is scheduled to meet today and tomorrow.
Donald Ratajczak, director of the Economics Forecasting Center at Georgia State University, said the sharp rise in the purchasing manager's report reflected a move by manufacturers to move quickly to respond to increased demand in the face of lean inventories. "Now that sales are coming back, the warehouses are empty, so they have to hustle to get material back in the pipeline," he said.
Mr. Ratajczak's forecast calls for real output of U.S. goods and services to rise at an annual rate in excess of 3% in the second half of the year. While other analysts are not as optimistic about renewed growth, "there's really no reason for the Fed not to stand aside and let it happen," he said.