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U.S. ISM Manufacturing Index Fell to 54.8 in January
Joe Richter in Washington


Feb. 1 (Bloomberg) -- U.S. manufacturing expanded in January at about the same pace as a month earlier, propelled by orders for business equipment that will drive the economy.

The Institute for Supply Management said today that its factory index fell to 54.8 last month from 55.6 in December. Readings above 50 indicate growth, and the January reading compares with an average of 55.5 for all of 2005. The group's gauge of prices paid for raw materials rose.

Business investment will be the economy's main source of strength this year as companies upgrade equipment and restock inventories, economists said. Stronger demand has been pushing up industrial capacity rates and threatening to stoke inflation, a reason the Federal Reserve raised interest rates yesterday.

``This is signifying healthy growth in manufacturing activity,'' said Richard DeKaser, chief economist at National City Corp. in Cleveland. ``Now we're pulling into a pace that is very healthy overall, albeit off of its autumn peaks.''

A reading of 55.5 was forecast for the January index, based on the median estimate in a Bloomberg survey of 69 economists. Estimates ranged from 53.2 to 57.5.

The ISM, based in Tempe, Arizona, surveys more than 400 companies in 20 industries including clothing, printing, transportation, furniture and plastics to compile its index.

In the dozen nations that share the euro, manufacturing expanded for a seventh month in January, a report today showed. The January factory index reading of 53.5 followed a 16-month high of 53.6 in December, said NTC Research Ltd., which compiled the measure for Royal Bank of Scotland Group Plc.

Inflation

The U.S. manufacturing group's gauge of prices paid rose to 65. The prices index was expected to rise to 64 from 63, the median estimate in the Bloomberg survey.

Concern that inflation may accelerate because companies are bumping up against capacity constraints and are trying to raise prices to pass along higher supply costs prompted the Fed to raise its overnight lending rate a quarter point to 4.5 yesterday.

President George W. Bush last night tried to shore up support for his economic program with his State of the Union speech. By a 59 percent to 37 percent margin, Americans disapprove of the way Bush is handling the economy, according to a Bloomberg/Los Angeles Times poll released last week.

``Our economy is healthy, and vigorous, and growing faster than other major industrialized nations'' Bush said. ``The American people have turned in an economic performance that is the envy of the world.''

Orders

The U.S. manufacturing group's new orders gauge, which makes up about a third of the total, fell to 58 from 59.1 in December. Order backlogs rose to 53.5 from 49.5.

The production index, a measure of work being performed, dropped to 56.6 from 57.8.

The institute's employment index fell to 51.3 from 53.6 in December. Economists look to this indicator for signs of monthly strength in the labor market.

The Labor Department probably will report on Feb. 3 that payrolls increased by 250,000 in January, 7,000 of which were factory jobs, according to the median forecast in a Bloomberg News survey. Manufacturers added 18,000 workers to payrolls in December, the most since August 2004, the Labor Department reported on Jan. 6.

Factory Reports

The institute's index of supplier deliveries, which measures how long it takes to get materials, increased to 55.3 from 52.9 in December. A measure of new export orders increased to 58.5 from 54.3.

The institute's inventories index dropped to 46.5 in January from 47.3. Inventory building contributed to economic growth last quarter for the first time since the first three months of 2005, the latest government data show.

The report follows recent data showing strength in manufacturing. Durable goods orders rose more than forecast in December, led by the biggest increase in business equipment since August, Commerce Department figures showed last week.

A Fed report on Jan. 17 showed industrial production rose for a third month in December, and the amount of capacity in use increased to the highest level since November 2000.

Providence, Rhode Island-based Textron Inc., the world's biggest maker of business jets through its Cessna unit, said fourth-quarter sales rose 15 percent as demand for commercial aircraft made by Airbus SAS and Boeing Co. set an industry record last year. Cessna and Raytheon Co.'s business jet unit may deliver a record number of planes this year after a surge in orders from corporations.

Corporate Confidence

Chief executives are more confident about the U.S. economy and plan to increase investment and hire additional workers, according to a monthly survey released last week by Chief Executive magazine. The magazine's CEO Confidence index rose to the highest since the survey was started in 2002.

Caterpillar Inc., the world's largest maker of earthmoving equipment, raised its earnings forecast for this year because of demand from mining and construction companies. Caterpillar has raised prices as much as 13 percent in the past two years as plants ran at full capacity to meet demand.

``We have the highest order activity in my memory,'' said James Owens, chief executive officer of the Peoria, Illinois- based company, on Jan. 26.

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