WASHINGTON -- The manufacturing sector broke out of a five-month slump and rebounded in October with the help of a strong rise in new orders, according to a purchasing managers' report issued yesterday.
The National Association of Purchasing Management said its index surged to 53.8% from 49.7% in September, the first reading above 50% since May. The index is based on a survey of industrial purchasing managers, and a reading above 50% is generally taken to mean that the manufacturing sector is expanding.
A separate report from the Commerce Department said construction spending in September increased 0.8%, the fifth straight monthly increase. It was the first five-month string of gains for the building industry since 1987, officials said.
Economists said the reports buttressed expectations that the economy will register faster growth in the current quarter after the 2.8% rise in the period from July to September reported by the Commerce Department last week.
"The economy is on a faster growth track now, and this is reflected in the manufacturing sector's resumption of growth, notably the automotive component, and the fact that housing starts have picked up in the summer," said Robert Dederick, chief economist for Northern Trust Co.
"The industrial part of the economy is picking up, and that was one of the big question marks as we left the summer months and got into the fall," said Richard Rippe, chief economist for Prudential Securities Inc.
"This is a quarter where 3% growth is almost assured, and the question really is whether we're going to do more, and I think we are," Dederick said.
According to the purchasing managers' report, the index for new orders surged to 60.8%, up from 50.3% in September for the highest level since January. In addition, a wide range of industries reported gains in order backlogs, suggesting that many companies are seeing increased demand for goods from their customers.
The purchasing managers' production index posted a healthy gain to 56% from 53.5% in September, the fourth straight monthly rise. And export orders, despite the recession in Europe and Japan, rose for the third straight month, to 55%.
Despite the increase in manufacturing activity, prices for materials bought by plant managers continued to moderate. The price index for October slipped to 47.6%, the second straight decline, after a string of advances dating back to February.
"There is no reason to have a kneejerk reaction over possible inflation," said Stuart Hoffman, chief economist for PNC Bank Corp., in Pittsburgh. "There may still be enough capacity that some improvement in manufacturing output isn't necessarily going to cause a big upturn in prices.
"It's kind of the best of both worlds. We have production and orders up, and yet prices are still kind of flattish," he said.
The 0.8% rise in construction spending reported by the Commerce Department was supported by the fifth straight monthly increase in outlays for single-family homes. Analysts were also impressed by large upward revisions for August and July. Total construction spending in August rose 0.5% instead of dropping 1.1%, and July outlays were up 1% instead of 0.1%.
The revisions cast the housing industry in a healthier light and helped answer the puzzle of why this year's large drop in interest rates had not done more to lure home buyers while other sectors such as consumer spending and capital spending by business have shown more life.
"All the interest-rate sectors of the economy are finally looking a lot better than during in the first six months of the year," said Hoffman.
Still, analysts said it remains to be seen whether the economy will maintain its momentum early next year or revert to slower growth.