The Institute for Supply Management-Chicago Inc. said today that business activity unexpectedly accelerated this month to a level not seen since August 2008. That's very good news. It adds more hope to the thesis that businesses will lead the economic recovery. So what's causing this activity, and is it sustainable?
Bloomberg reports that, in addition to the ISM index's jump, manufacturing activity also appears to be improving:
An increase in bookings also propelled other regional measures this month. The National Association of Purchasing Management-Milwaukee said its factory gauge climbed to 57 from 50 in October. Manufacturing activity in Texas expanded in November for the first time in two years, according to a report from the Fed Bank of Dallas.
The figures underscore gains in earlier reports. The Fed Bank of New York's Empire State Index showed manufacturing in its district expanded in November for a fourth month, while the Philadelphia Fed's gauge climbed to the highest level in more than two years.
Rising sales, spurred in part by government incentives, and growing demand from abroad have led to a drawdown in inventories that will boost production and sustain the recovery.
The first part of that sounds like stimulus. So it may not last, but likely will through 2010, since the stimulus has proven to be quite slow.
But the second part is more meaningful. Growing foreign demand for U.S. goods is probably being caused mostly by the decline of the dollar. This marks one of the positive aspects of having a weak currency. Since the dollar isn't likely to soar again anytime soon, this trend could last for a while.
From the article, it sounds like many producers are still draining inventories, so production is not being ramped up as much as demand would indicate. Once inventories are sufficiently low, businesses will have no choice but to begin to hire again, and unemployment will finally begin decreasing. And once more Americans are employed, they will start spending more, further fueling business activity. Let's hope that first domino has really fallen, and the November activity isn't a mere blip.
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