U.S. manufacturing grew at the fastest pace in six months in December, capping a late-year rally in the sector, while a rise in new orders suggested good momentum in 2012, an industry report showed on Tuesday.
The Institute for Supply Management said its index of national factory activity rose to 53.9, the best showing since June, from 52.7 in November. The reading topped expectations of a 53.2 reading, according to a Reuters poll of economists. An index reading above 50 indicates expansion.
It's a pretty decent report overall, said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York. We're not roaring ahead here, but it's also not collapsing. That's consistent with our overall view of the economy in 2012.
U.S. stocks added to their gains after the report, with the Dow and S&P 500 indexes each advancing 2 percent, while the euro rose against the dollar and U.S. Treasuries fell as investors took on more risk.
New orders, which economists consider a leading indicator of future activity in the sector, rose to 57.6 from 56.7, while the employment component jumped to 55.1 from 51.8.
The last component, which also hit its highest level since June, was encouraging for an economy still struggling under the weight of an 8.6 percent jobless rate, Porcelli said.
Data due on Friday is expected to show the U.S. economy added 165,000 new jobs in December, but also a slight rise in the jobless rate to 8.7 percent.
Overall, 2011 is finishing on an upswing, with a lot of indicators pointing positive, said Bradley J. Holcomb, chairman of the ISM Manufacturing Business Survey. He noted that customer inventories fell, suggesting increased demand.
Another report showed a rise in private and public projects lifted construction spending to its highest level in nearly 18 months in November, another sign that the economy picked up speed in the fourth quarter of 2011.
Small business borrowing also improved in November, nearing a four-year high, according to the most recent Thomson Reuters/PayNet Small Business Lending Index.
HOUSING, EUROPE TO WEIGH IN 2012
Economists, however, are not expecting a full recovery for the broader U.S. economy in 2012, particularly with the housing market still in the doldrums and unemployment elevated.
In a note to clients, Goldman Sachs said it expects growth in 2012 to look broadly similar to 2011, bumping along at a below-trend pace. High oil prices, they said, could also slow the pace of expansion.
Crude oil rose above $110 a barrel on Tuesday as tension between Iran and the United States stirred fear of a possible disruption to oil supplies from the Middle East.
Europe's debt crisis may also mean trouble for U.S. growth and the manufacturing sector in particular. Economists fear deep spending cuts and tax hikes across Europe to deal with large deficits almost guarantee a euro zone recession.
We are very nervous about the impact on U.S. exporters of the recession in Europe, which is likely to prove deep and long, said analysts at High Frequency Economics. Export of goods are very important to manufacturing export-focused firms.
John Doyle, currency strategist at Tempus Consulting in Washington, said: It's the global economy. Negative economic events overseas eventually trickle back to the U.S.
The United States is one of the few major countries where manufacturing is holding up. While Canadian factory output rose last month, the euro zone's industrial sector suffered its fifth consecutive month of contraction in December, while Asian factories had a weak month to end the year.
In Britain, December capped the worst quarter for the manufacturing sector in more than two years.
(Additional reporting by Luciana Lopez, Emily Flitter and Ellen Freilich; Editing by Chizu Nomiyama and Dan Grebler)