Factory activity hits two-year high as orders surge

U.S. factory activity accelerated to a two-year high in December amid a surge in new orders and employment, suggesting some of the oil-related drag on manufacturing was fading.

Other data on Tuesday showed construction spending hitting a 10-1/2-year high in November, which could provide a lift to fourth-quarter economic growth. The reports suggested president-elect Donald Trump was inheriting a strong economy, marked by a labor market that is near full employment, from the Obama administration.

The Institute for Supply Management (ISM) said its index of national factory activity rose 1.5 percentage points to a reading of 54.7 last month, the highest since December 2014. A reading above 50 indicates an expansion in manufacturing, which accounts for about 12 percent of the U.S. economy.

A gauge of new orders jumped 7.2 percentage points, to the highest level since November 2014. A measure of factory employment rose 0.8 percentage point, to the highest level since June 2015.

A collapse in oil prices in 2015, together with a surge in the dollar, have hobbled manufacturing. Much of the impact has been through weak business spending on equipment, which has contracted for four consecutive quarters.

factoryactivity_small Factory activity hits two-year high as orders surge Business

But with oil prices rising and touching 18-month highs on Tuesday, manufacturing is starting to perk up. Gas and oil well drilling has risen over the last several months.

In a separate report, the Commerce Department said construction spending increased 0.9 percent to $1.18 trillion in November, the highest level since April 2006. It was boosted by gains in both private and public sector investment

Construction spending in October was revised up to show a 0.6 percent rise instead of the previously reported 0.5 percent increase. Construction spending was up 4.1 percent from a year ago in November.

November’s solid increase and October’s upward revision to construction spending could prompt economists to raise their gross domestic product estimates for the fourth quarter.

The Atlanta Federal Reserve is currently forecasting GDP increasing at a 2.5 percent annualized rate in the fourth quarter. The economy grew at a 3.4 percent rate in the third quarter.

The dollar rose to a fresh 14-year high against a basket of currencies after the data, while prices for U.S. government debt fell. U.S. stocks were trading higher.

Spending on private construction projects jumped 1.0 percent in November to its highest level since July 2006 as single-family home building, as well as home renovations, increased.

Investment in private nonresidential structures — which include factories, hospitals and roads — rose 0.9 percent after tumbling 1.5 percent the prior month.

Public construction spending gained 0.8 percent in November to the highest level since March. It was the fourth straight month of increases. Outlays on state and local government construction projects rose 0.6 percent, also gaining for a fourth consecutive month.

Federal government construction spending surged 3.1 percent after rising 0.2 percent in October.