The manufacturing sector expanded more than expected in August, but the employment picture remained grim.
The Institute for Supply Management said Tuesday that its factory index increased to 54.7 from 51.8 in July. That’s the highest level since December and marks the second straight month of expansion. Economists were expecting a reading of 54. A number above 50 signifies expansion and one below 50 signifies contraction.
The production component of the index rose to 61.6 from 53.3, the largest jump since June 1999. With inventories lean, companies are placing more orders and factories are making more to meet rising demand.
“Production has been gradually moving up in the last few months,” said J.T. Battenberg, chief executive of Troy, Mich.-based Delphi Corp., the world’s largest auto-parts maker. “It’s a positive trend. We’re cautiously optimistic.”
But the rebound in manufacturing has yet to translate into hiring. The employment component of the index fell to 45.9 from 46.1 in July, indicating more jobs were cut at the nation’s factories than a month earlier. The employment component has been below 50 for 34 straight months.
“The thing we haven’t yet seen is a pick-up in hiring because firms are still relying on productivity gains” to meet demand, said Kevin Logan, senior market economist at Dresdner Kleinwort Wasserstein in New York.
The manufacturing sector has lost 2.7 million jobs since June 2000.
“It’s a disappointment that factory employment appears to have declined slightly faster in August than in July,” said Patrick Fearon, an economist at A.G. Edwards & Sons Inc. in St. Louis.
Norbert J. Ore, who oversees the index for the ISM, said the numbers were encouraging despite the decline in the employment number.
“Though two months of growth do not establish a trend, there is strength in the various segments of this report that we have not seen for some time,” Ore said.
He noted that new orders and production have both had readings above 50 percent for four consecutive months, suggesting that “the continuation of a second-half recovery appears on track.”
The new orders index, which accounts for about a third of the total, rose to 59.6 from 56.6 in July.
The index of inventories fell to 42.5 from 45.9, indicating they are being run down at a faster pace.
“With strong sales and low inventories, production will also have to be increased” in coming months, said Steven Wood, principal economist at Insight Economics LLC in Walnut Creek, Calif.
Of the 20 industries covered in the report, 13 reported growth, including leather, furniture, wood and wood products, apparel, electronic components, printing, chemicals, fabricated metals, and glass and stone.
