Demand for factory goods rises most in four months

January 5, 2012

The need to rebuild inventories may supersede new spending on business equipment as the main factor propelling manufacturing gains in the U.S. in 2012, according to Bloomberg.

The Associated Press reported that overall factory orders rose 1.8 percent, according to the Commerce Department. This marked the largest increase since July, and occurred chiefly because of a surge in the number of airplane orders.

Although a decline occurred in demand for so-called core capital goods, such as computers and electronic equipment, this drop may only be temporary, according to the news outlet. A private survey showed earlier this week that U.S. factories ended the year with their best month of growth since late spring.

The Institute for Supply Management (ISM) previously noted that factories hired more workers last month, saw the most growth in new orders since April and ramped up production.

Conrad DeQuadros and John Ryding, analysts for RDQ, told the AP that they are more likely to overlook the Commerce Department numbers in favor of the positive ISM survey.

"This report for November activity feels like somewhat old news since the state of manufacturing in December has already been indicated in yesterday's ISM report and it appears from that survey that manufacturing growth is picking up," the economists said in a client note.

According to the news outlet, the Commerce Department report did show a 3.7 percent increase in the demand for durable goods – items expected to last at least three years – reflecting gains in demand for airplanes, autos and primary metals such as steel and industrial machinery.

Bloomberg reported that positive data also came from the low levels of inventories that many manufacturers had at the end of the year.

"Low customer inventories provide pull and the promise of new orders for manufacturing," Bradley Holcomb, chairman of the ISM factory survey, told the news outlet in a phone interview.

Stephen Stanley, chief economist at Pierpont Securities, noted that consumer spending will need to keep growing in 2012 to ensure that manufacturers will continue to boost production. He asserted that the availability of employment opportunities will affect the inventories of companies.

"I look for an improving labor market to generate sufficient income gains to allow households to spend decently and save more as well," Stanley told Bloomberg. "The expansion is more likely to plod than gallop."