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ISM Factory Index Hits A 2-Year High As Hiring Picks Up

A key factory gauge rose to its best level in more than two years, a sign that the U.S. economy is gaining steam. But the gridlock that brought the federal government to a halt Tuesday could derail any momentum, analysts said.

The Institute for Supply Management's manufacturing index rose 0.5 point in September to 56.2, its fourth straight monthly gain and the highest level since April 2011. Readings over 50 signal expansion.

The details also were upbeat. The production subindex edged up to 0.2 point to 62.6. The jobs gauge jumped 2.1 points to 55.4, the strongest since June 2012.

The ISM report shows that the economy is "chugging along," said John Canally, an economist at LPL Financial, and manufacturing is "doing decently.

Auto production has been a factory bright spot as Americans replace decade-old vehicles. Automakers overall reported lower U.S. sales in September vs. a year earlier, in large part due to Labor Day sales being included in August figures. GM (GM) and Toyota (TM) sales fell, while Ford (F) and Chrysler had increases.

In ordinary times, Canally said, a report like this would likely be the evidence needed by Federal Reserve policymakers that it's safe to begin pulling back on the bond-buying program.

But with gridlock paralyzing Washington, all bets are off. A short shutdown wouldn't be a major problem, said Scott Brown, chief economist at Raymond James. A temporary loss of income for government workers wouldn't register on the macroeconomy, but any longer than that could make it challenging for workers to manage larger payments, like those for auto or home loans. Any contraction in spending also has a multiplier effect, meaning people who offer services and supplies to the government would also take a hit.

The loss of business confidence could be even more meaningful, Brown said. "Uncertainty tends to paralyze people. That could lead to weakness.

In fact, manufacturing started 2013 strong, and then saw a lull in activity in the summer as the impact of the sequester took hold, Brown said. Absent those across-the-board spending cuts and the payroll tax hikes at the start of the year, "we were probably looking at GDP to be 3.5% to 4%.

Once the government gets past the current stalemate, the debt limit debate also looms. More government-enforced austerity could derail the fragile economy yet again, Brown said. "That's the story of this year," he added.

Fed Chairman Ben Bernanke listed federal fiscal dysfunction and drag as a main driver of the decision not to begin tapering quantitative easing last month.

A one-week shutdown is likely to shave 0.1% off GDP, Canally said. A monthlong halt would have a 0.3%-0.4% hit. Most shutdowns have been two to six days, he said. Yet Canally noted that the current economy is much shakier than in past shutdowns.

"Every tenth counts," he said.