Recovery in manufacturing continues

A well-respected survey of the manufacturing landscape turned in its best performance in over three years, signaling that goods producers continue to recover following a near collapse in demand last year.

The ISM Manufacturing Index increased from 53.6 in November to 55.9 in December, the highest reading since April 2006 and ahead of the Bloomberg estimate of 54.8. A reading above 50 is expansionary.

A 5.2 point gain in new orders to an impressive 65.5 suggests that manufacturers will continue to see gains in production in the short term, while the survey reflected that customer inventories remain too low, which should also support activity.

Following the shock in the credit markets over a year ago, demand for goods came to a screeching halt, and manufacturers responded by slashing production in order to keep a lid on ballooning inventories.

Painful cuts have helped companies whittle away at excess stockpiles, which are coming into alignment with sales.  However, many firms remain reluctant to hire, as evidenced by the ISM survey, and businesses are still shy when it comes to ramping up spending.

Re-stocking and modest increases in demand have been supporting production, and monetary policy around the globe remains accommodative.  Increased hiring and investment will be critical if the recovery is to reach a more self-sustaining path.