US manufacturing expands

WASHINGTON -- US manufacturing activity expanded in December after contracting the previous month, a trade group said yesterday, leaving economists cautiously hopeful about the sector's prospects for this year.

The top areas of concern at the start of 2007 are the slowdown in the automotive and residential real estate segments of the economy, and the expectation is for weaker manufacturing growth to be mitigated by rising exports and business investment.

The Institute for Supply Management said yesterday its manufacturing index registered 51.4 in December, compared with 49.5 in November, which was the first time the sector's activity shrank since April 2003. A reading below 50 indicates contraction, while above 50 signals expansion.

December's manufacturing index came in above the average analyst expectation.

Michael Gregory, senior economist at BMO Capital Markets, said the ISM report and other economic indicators released yesterday support the notion that the US economy is experiencing a "soft landing" following rapid expansion early in 2006.

In a separate report released yesterday, the Commerce Department said construction activity showed further weakness in November as spending on homes dropped for a record eighth consecutive month. Building activity declined 0.2 percent to a seasonally adjusted annual rate of $1.18 trillion, the agency said, though that was less than the 0.6 percent drop the markets expected.

The weakness was led by a 1.6 percent plunge in home construction.

Norbert J. Ore, chair of the ISM, said the manufacturing sector was "resilient" in December in part because of reduced material prices that may signal easing inflationary pressures going forward.

But David Resler, chief economist at Nomura Securities in New York, said that despite the improvement over November's data, growth in the sector is by no means robust.

The ISM's new orders index rose in December to 52.1, compared with 48.7 in November. And the cost of manufacturers' raw materials decreased sharply, with the prices index falling to 47.5 from 53.5 a month earlier.