U.S. Markets closed

Manufacturing Remains Fragile After Fiscal Cliff Deal On Taxes

Manufacturing activity returned to growth last month but remained fragile as the sector braces for ongoing fiscal policy uncertainty that was only partly eased by the New Year's Day deal.

The Institute for Supply Management's index rose to 50.7 in December from 49.5. Readings above 50 indicate growth.

An export orders subindex shot up to 51.5 from 47, indicating expansion for the first time since May. An imports gauge jumped to a six-month-high 51.5 from 48.

Manufacturers also started hiring again with the employment gauge climbing 4.3 points to 52.7.

U.S. stock indexes leapt on Tuesday's deal to extend Bush-era tax cuts for most Americans. Industrial giants GE (GE), Boeing (BA) and Alcoa (AA) rallied. So did defense firms Lockheed Martin (LMT) and General Dynamics (GD) even though steep Pentagon cuts were delayed by just two months.

The overall ISM survey was less upbeat. Production slowed, and overall orders growth was flat at 50.3. Of the 18 industries tracked, seven reported expansion vs. nine contracting.

"We are experiencing a mix of results — domestic up year over year for industrial business, down in retail and down in (Latin America), EU and Asia," an apparel industry purchasing manager told ISM. "Next year is anyone's guess — has never been so unpredictable.

Manufacturers and the rest of the U.S. economy still face uncertainty on the debt ceiling in addition to the delayed budget cuts.

The odds of another downgrade to U.S. debt are also higher, a major disruption like a dock worker strike could trigger a recession, and businesses must grapple with ObamaCare costs next year, warned Robert Dye, chief economist at Comerica.

The fiscal cliff deal lifts some uncertainty but also means taxes will go up for most households.

While the ISM index improved in December, it has stayed in a narrow range above or below 50 for the past six months, and could slip back into negative territory in January, Dye noted.

Dye estimates GDP grew at roughly a 1% annual rate in Q4 and expects higher taxes will keep growth at around 1% in the first half of 2013. "The economy doesn't have a lot of momentum going into this fiscal drag.

The recovering housing market should continue to lift related industries, and a furniture products purchasing manager told ISM that business is strengthening.

November construction spending retreated 0.3% from the prior month, though it was up 7.7% from a year earlier. Residential outlays rose 0.4% after October's monthly gain of 1.3%. Nonresidential spending fell 0.6%.

Fiscal policy will weigh further on housing and the rest of the economy.

The eventual tax and spending impact should amount to 1 percentage point of GDP growth through 2013, 700,000 fewer new jobs, and a half percentage point in unemployment, according to Mark Zandi, chief economist at Moody's Analytics.

Tuesday's deal also failed to improve fiscal sustainability, leading Zandi to expect a subsequent deficit-reduction package that would be just half of what's needed as well as 2013 growth of just over 2%.

"Growth will accelerate in 2014, but the downside risks have increased because of the deal's shortcomings," he wrote in a note. "This means more political brinksmanship this year, with uncertain consequences for business, consumer and investor confidence."