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Manufacturing in U.S. expands at fastest pace in 3 years

An employee rolls up fabric for a pleat mold that will be steam baked to hold the form at the Dennis Uniform Manufacturing Co. facility in Portland, Oregon, U.S., on Monday, Aug. 25, 2014.

Meg Roussos/Bloomberg

Manufacturing expanded in August at the fastest pace in three years as orders grew by the most in a decade, showing U.S. factories will help power the economy into the third quarter.

The Institute for Supply Management's index unexpectedly climbed to 59, the highest level since March 2011, from July's 57.1, the Tempe, Arizona-based group reported today. Readings greater than 50 indicate growth. The median forecast in a Bloomberg survey of economists was 57.

A drive to update plants and equipment is propelling gains in business investment that will probably keep American factories busy even as consumer spending shows signs of cooling. Better wage growth could broaden household purchases beyond automobiles and help sustain the pickup in manufacturing, which makes up about 12 per cent of the economy.

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"Things are doing relatively well," Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, said before the report, citing auto sales as a bright spot for manufacturing. "We're generally optimistic."

Estimates for the factory index from 78 economists in the Bloomberg survey ranged from 55 to 58.5, all falling short of the actual result.

Global Manufacturing The news on manufacturing was less positive overseas as U.K. factory growth slowed more than forecast last month and Italian manufacturing shrank as Europe suffered the fallout from weakening demand and mounting geopolitical risks, other report showed today.

Stocks held earlier losses after the report. The Standard & Poor 500 Index fell less than 0.1 per cent to 2,002.61 at 10:10 a.m. in New York.

The increase in the ISM index came as the group's new orders gauge climbed to 66.7, the highest since April 2004.

The group's production gauge rose to the strongest since May 2010, reaching 64.5 from 61.2 the prior month. The measure of orders waiting to be filled climbed to 52.5 from 49.5.

The report also showed gauges of factory inventories and customer stockpiles both advanced in August from a month earlier. The group's factory employment measure was little changed in August at 58.1 compared with a three-year high of 58.2 the prior month.

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The figures follow data last week that showed the economy expanded at a 4.2 per cent annualized pace in the second quarter after shrinking 2.1 per cent in the first three months of the year.

Consumer Spending Consumer spending, which accounts for almost 70 per cent of the economy, started the third quarter on soft footing. Purchases retreated in July for the first time in six months as wages failed to accelerate, a report last week showed. At the same time, a healing job market could provide momentum going forward: the economy has added more than 200,000 jobs for each of the six months through July.

People who are confident in their employment prospects may be more willing to take on big purchases such as automobiles. Cars and light trucks sold at a 16.4 million pace in July, a slowdown from 16.9 million in June that was the fastest rate since mid-2006, figures from Ward's Automotive Group show.

Gains in business investment may help make up for some of the shortfall among households. New orders for durable goods soared 22.6 per cent in July after a revised 2.7 per cent gain in June that was bigger than previously estimated, according to Commerce Department data issued last week.

Durable Goods Though the surge was driven by demand for aircraft, bookings for motor vehicles and parts also climbed. Revised data for June reflected improving demand for a broad array of items, including computers, electrical equipment and machinery.

Hewlett-Packard Co. last month reported fiscal third– quarter sales that topped analysts' estimates, fueled by improving personal-computer sales.

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Corporate spending on PCs has also helped lift the results of other technology companies recently. Intel Corp. in July forecast revenue that exceeded analysts' estimates for the current quarter, while Microsoft Corp. said it's seeing signs of improvement in the PC market.

"We continue to see customers looking to refresh their aging" computers, Meg Whitman, chief executive officer of Palo Alto, California-based Hewlett-Packard, said on an Aug. 20 earnings call. "We believe we can continue to gain share in PCs, despite the challenges in this market as it consolidates."

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