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With employment jumping to its highest level in nearly five years, the Institute for Supply Management - Chicago released a report on Friday showing that activity in the Chicago-area manufacturing sector unexpectedly expanded at a faster pace in the month of January.
The report showed that the index of regional manufacturing activity jumped to 61.5 in January from 58.7 in December, with a reading above 50 indicting growth in the sector. The increase surprised economists, who had expected the index to slip to a reading of 57.2.
The unexpected increase extended a recent upward by the index, which rose for the fourth consecutive month to reach its highest level since November of 2005.
A substantial turnaround in employment contributed to the strength in the sector, with the employment index surging up to 59.8 in January from 47.6 in December. With the increase, the index rose to its highest level since April of 2005.
Production and new orders also expanded at a faster pace compared to the previous month. The production index rose to 66.6 in January from 64.2 in December, while the new orders index increased to 66.4 from 64.4.
The report also showed that the inventories index jumped to 48.7 in January from 38.6 in December, indicating a notable slowdown in the pace of contraction in inventories.
On the inflation front, the prices paid index surged up to a reading of 66.2 in January from 55.6 in the previous month.
The ISM - Chicago noted that while rising prices are a curse to buyers, expanding price increases are a confirmation of expanding economic activity.
Commenting on the data, Peter Boockvar, equity strategist for Miller Tabak, said, " Bottom line, the number was solid and provides further evidence of the manufacturing contribution to GDP as inventories get built up again."
"However, the index measures the direction of improvement, not the degree so don't extrapolate that businesses are hiring again like its Apr '05 but we'll take what we can get for the labor market, particularly in the hard hit manufacturing sector," he added.
Earlier in the day, the Commerce Department released a report showing that GDP increased at an annual rate of 5.7 percent in the fourth quarter compared to the 2.2 percent growth seen in the third quarter. Economists had been expecting GDP to increase by about 4.7 percent for the quarter.
With the significant acceleration in the pace of growth, GDP growth for the quarter marked the biggest increase since the third quarter of 2003.
The strong growth in the quarter was largely due to a notably slower rate of decline in inventories, with private business inventories falling by $33.5 billion in the fourth quarter compared to a decrease $139.2 billion in the third quarter.
The Commerce Department noted that the change in real private inventories added 3.39 percentage points to the fourth quarter GDP growth.
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