I only wish manufacturing made up more of the economy

03/01/2010 12:14 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Manufacturing continues to contribute more than its share to the economic recovery, according to index numbers released this morning (March 1) in the Institute for Supply Management survey of purchasing managers.

Unfortunately, manufacturing accounts for only about 12% of U.S. economic activity.

U.S. manufacturing expanded in February for a seventh consecutive month.

The Institute for Supply Management’s index did drop to 56.5 from January’s 58.4. But that was a drop from a very high level. January’s reading was the highest since August 2004. In the survey anything above 50 indicates an expansion.

Below the top number the survey was spotty.

Production and new orders slowed in February with the production index falling to 58.4 from 66.2 and the new orders index dropping to 59.5 from 65.9. Inventories still came in below the 50.0 threshold between expansion and contraction but at 47.3 they did inch closer to a positive reading. That was up from 46.5 in January. The survey’s employment index climbed to 56.1. That’s the highest level since January 2005.

A similar manufacturing index in China moved in much the same way: still up but at a slower place.

The manufacturing sector index for China, reported by HSBC Holdings and Market Economics, came in at 55.8 for February. The index stood at 57.4 in January. (Again anything above 50 signals an expansion.)

All these indexes need to be taken with a grain of salt (or three.) They’re conducted simply by asking purchasing managers whether business is better or worse and what they’re planning for the future. One possible danger in these numbers is that they may simply be reflecting rebuilding of inventories from a very low state at the end of 2009. Inventory rebuilding contributed 3.88 percentage points to the fourth-quarter 5.9% U.S. economic growth rate in the United States.

I remain positive but cautious on the U.S. manufacturing sector. I’m adding Fluor (FLR) to Jim’s Watch List with this post. The stock pulled back on weak guidance for 2010 last week and it’s attractively priced in a recovery that includes investment in factories, power plants, and infrastructure.

Now all we need, of course, is that recovery.

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