US factories, the final holdout, now seen humming

CHICAGO, Aug 29, 2003; Ros Krasny writing for Reuters reported that Federal tax cuts, higher defense spending and a stabilizing jobs market are finally giving a kick to U.S. manufacturing, until now the last holdout of the economic recovery.

Regional reports, especially Friday's report on Chicago-area business, have given a more upbeat read on factory output recently, and a national survey due out on Tuesday could confirm what many economists are nearly certain is happening.

Economists expect the ISM index to be 53.8, up from 51.8 in July, which would be the second month the survey will have been above 50, the critical threshold that separates expansion from contraction.

Before July's positive reading, the U.S. manufacturing sector shrank for five straight months, drooping on anxiety surrounding the U.S.-led invasion of Iraq.

Some analysts even think the August ISM survey will show that factories added jobs for the first time since September 2000, a positive development that would bode well for economic growth in the second half.

"Manufacturing activity might actually stop bleeding jobs this month," said Ram Bhagavatula, chief economist at Royal Bank of Scotland Financial Markets.

Friday's report from the National Association of Purchasing Managers-Chicago showed job growth for the first time since March 2000, helping the highly industrialized Midwest region expand at the fastest pace in 15 months.

"The Chicago area is a bellwether of sorts for the national economy. If things are getting better there, they are likely getting better everywhere," said Chris Low, chief economist with FTN Financial.

Rising factory jobs would create a "virtuous circle" by putting more spending firepower in the hands of more low- and middle-income consumers -- many of whom would immediately increase spending, potentially boosting employment even more.

Richard Yamarone, senior economist with Argus Research Corp., said seeds for growth were planted by tax cuts that fattened the wallets and purses of many Americans.

Federal income tax cuts and tax rebates pushed disposable personal income up by 1.5 percent in July, even though wages and salaries were flat.

"Disposable incomes were up strongly in July. If you put more money into the pockets of American consumers, they will spend it," Yamarone said.

Also in July, consumers spent 2.1 percent more on big ticket items like autos or washing machines, far outpacing spending growth on non-durable goods and services.

That's good news for the nation's factories.

Economists at Lehman Bros. said in a research report that growth in manufacturing output should be led by the automotive sector and a pick-up in capital goods purchases.

Getting businesses on board the spending train would be a powerful force after several years during which the U.S. consumer was left to shoulder most of the burden.

The ISM will issue its monthly manufacturing report at 10 a.m. EDT (1400 GMT) on Tuesday.