US manufacturing turns up after 18-month slump

Charlie Riedel/AP
Chris Wasmer works on an engine for a 2010 Ford Escape at Ford's assembly plant in Claycomo, Mo. The Institute for Supply Management said its manufacturing index in August rose to its highest level in more than two years.

The arduous contraction in American manufacturing is over.

After 18 months of steady decline, factory production in August rose to its highest level since June 2007, according to a report Tuesday by the Institute for Supply Management (ISM).

Eleven of 18 sectors reported increases as businesses, having slashed their inventories to survival levels, began placing new orders to replenish their stock. The ISM's new orders index rose a better than expected 9.6 points to 64.9 percent, its highest level since December 2004.

"The growth appears sustainable in the short term, as inventories have been reduced for 40 consecutive months and supply chains will have to restock to meet this new demand," wrote Norbert Ore, chairman of the ISM's business survey committee, in a release.

The long-term question is what consumers will do. If they don't increase spending, then the bounce in production to replenish inventories will be temporary, economists warn.

"Apart from a very near-term bounce from the 'cash for clunkers' program, we feel that the headwinds for consumer spending remain too brisk to expect much help on this front," wrote Joshua Shapiro, chief economist at MFR Inc., in an analysis.
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