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US Manufacturing, Construction Pick Up in January

Manufacturing grew in January at the fastest pace in seven months, boosted by a rise in new orders. The report bolsters other data showing the U.S. economy started the year strong.

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The Institute for Supply Management, a trade group of purchasing managers, said its manufacturing index rose last month to 54.1 from 53.1 in December. Readings above 50 indicate expansion.

Consumers are buying more cars and trucks, while businesses ordered more machinery and other equipment. That has driven factory output. The sector has expanded for 29 straight months, according to the index.

A measure of hiring dipped, indicating factories are still adding jobs but at a slower pace than in December. Export orders also rose, a sign that U.S. manufacturers haven't yet been affected by Europe's slowing economy.

Manufacturing output has jumped in recent months. Auto sales have rebounded from the spring, when Japan's earthquake disrupted supply chains and fewer cars were available on dealer lots.

Businesses also ordered more big-ticket manufactured items in December, the government said last week. And orders for so-called core capital goods, which are a good measure of businesses' investment plans, reached an all-time high last month.

Factory output rose in December by the most in a year, according to the Federal Reserve . Production rose for goods used in the early stages of manufacturing, such as metals, wood products and construction materials. That suggests the output of finished goods will pick up.

Still, U.S. factories are vulnerable to economic shocks.

Exports are likely to decline if Europe suffers a recession, as many predict.

And the key reason the economy grew at an annual rate of 2.8 percent in the final three months of last year was that companies restocked their warehouses. That kept helped drive factory output at the end of last year.

Most economists say that restocking is certain to slow in the first quarter of this year.

Unless consumer spending picks up, businesses won't be able to sell off that extra inventory, and may have to cut back on future orders.

Consumers increased their spending only 2 percent in the final three months of last year. Many have been weighed down by wages that haven't kept pace with inflation .

They need more jobs and higher pay. Hiring has picked up in recent months, but the unemployment rate is still high, at 8.5 percent.

Business spending on equipment and software rose in the final three months of last year, but at the slowest pace since the recession ended, the government said last week.

Most economists expected the combination of weaker inventory growth and tepid consumer spending will lead to slower growth in the January-March quarter. Many are predicting just 2 percent annualized growth in that stretch.

Meanwhile, builders also increased their spending in December for the fifth consecutive month, offering more evidence of a turnaround in the battered construction industry. Housing, nonresidential construction and government projects all showed gains.

The Commerce Department said spending on construction projects rose 1.5 percent in December after a revised 0.4 percent gain in November. That pushed spending to a seasonally adjusted annual rate of $816.4 billion, the highest level in 20 months.

Even with the gains, spending for all of 2011 was just $787.4 billion. That's 2 percent lower than the previous year and roughly half the level economists consider healthy. Last year was the worst year on record for single-family home construction, according to a separate government report previously released.

Analysts say it could be four years before the industry returns to full health.

Residential construction rose 0.8 percent on the strength of single-family homes. Nonresidential building jumped 3.3 percent, led by factory construction. Government spending rose 0.5 percent.

Builders broke ground on more homes in each of the last three months of last year. The increase in residential construction contributed to annual growth of 2.8 percent in the October-December quarter.

Still, residential construction fell at an annual rate of 1.4 percent last year, the sixth straight year of decline. The economy expanded just 1.7 percent last year, roughly half the growth rate in 2010.

The construction industry was hit hard by the housing bust and has had trouble recovering since the recession ended more than two years ago.

Severe budget problems have squeezed state and local governments. The federal government has come under pressure to control soaring budget deficits. Both have put pressure on government construction spending.

Private builders haven't fared much better. While their spending increased, they have scaled back on construction plans and are working from depressed levels.

About 302,000 new homes were sold last year, making 2011 the worst sales year on records dating back to 1963. And it coincides with a report last week that said 2011 was the weakest year for single-family home construction on record.

Still, sales of new homes rose in the final quarter of 2011, as did sales of previously occupied homes. Homebuilders are slightly more hopeful because more people are saying they might consider buying this year. And mortgage rates have never been cheaper.

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