U.S. Business Activity Expands

Expected to drop, orders and production pick up in June.

Business activity in the U.S. unexpectedly expanded at a faster pace in June as orders and production picked up, signaling manufacturing will keep driving growth in the world’s largest economy.

The Institute for Supply Management-Chicago Inc. said today its business barometer climbed to 61.1 this month from 56.6 in May. Economists called for the index to drop to 54, according to the median forecast in a Bloomberg News survey. Figures greater than 50 signal expansion.

The data are at odds with regional factory reports from Philadelphia and New York that showed Japan’s earthquake-related supply shortages continue to work their way through the economy. Federal Reserve policy makers view the recent slackening in the expansion as temporary, signaling growth will pick up by yearend at the same time overseas demand benefits companies like Illinois Tool Works Inc.

“Manufacturing remains a key component of the economic expansion,” David Semmens, a U.S. economist at Standard Chartered Bank in New York, said before the report. “Strength in overseas markets is driving exports, which will benefit manufacturing. We’ll see an acceleration in the second half.”

Stocks extended gains after the figures, with the Standard & Poor’s 500 Index rising 0.7 percent to 1,316.23 at 9:51 a.m. in New York. Treasuries fell, pushing up the yield on the benchmark 10-year note to 3.13 percent from 3.11 percent late yesterday.

Another report today showed the labor market is struggling to improve as more Americans than forecast filed first-time applications for unemployment benefits. Jobless claims dropped by 1,000 to 428,000 last week, the Labor Department said. Economists surveyed by Bloomberg projected 420,000 claims, according to the median estimate.

The Bloomberg Consumer Comfort Index reached a 10-week high as cheaper gasoline provided some relief. The Bloomberg measure increased to minus 43.9 for the period ended June 26 after 44.9 the prior week.

Estimates of the 54 economists surveyed before the Chicago group’s factory report ranged from 49.5 to 58.5.

The gauge of new orders climbed to 61.2 in June from 53.5, while the production gauge increased to 66.9 from 56.

The employment measure fell to 58.7, the lowest this year, from 60.8 in the prior month. The index of backlogs declined to 49.3 from 51.7.

The gauge of inventories decreased to 46.9 from 61.6, today’s report showed.

Illinois Tool Works, based in Glenview, Illinois, is among manufacturers experiencing stronger sales in emerging markets.

China is a “very rapidly growing area for us,” Chief Executive Officer David Speer said on a conference call with investors on June 14. Brazil also is “an economy that’s got lots of interesting growth prospects and it’s an economy you definitely have to be in.”

Economists watch the Chicago index and other regional manufacturing reports for an early reading on the national outlook. The Chicago group says its membership includes both manufacturers and service providers, making the gauge a measure of overall growth. Its members have operations across the U.S. and abroad.

The Federal Reserve Bank of Philadelphia’s index showed manufacturing in the region shrank in June for the first time in nine months, while the New York Fed’s report showed a contraction at factories this month as the so-called Empire State measure dropped to the lowest level since November.

The ISM’s monthly national factory index probably also declined in June, reflecting a slower pace of expansion, according to the median forecast of economists surveyed. The Tempe, Arizona-based group’s figures are due tomorrow.

Fed officials announced they will maintain record monetary stimulus to support a flagging economy after completing a $600 billion bond-purchase program that was scheduled to end today.

“The economic recovery is continuing at a moderate pace, though somewhat more slowly” than policy makers had expected, according to a Fed statement on June 22. “The slower pace of the recovery reflects in part factors that are likely to be temporary,” such as supply chain disruptions stemming from the Japanese disaster in March.



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