GLOBAL manufacturing activity improved in 2005, but showed signs of losing momentum at year- end, bogged down by slower growth in the United States, the world's largest economy.
Japan's economic turnaround and ongoing improvement in the euro zone have offset slower U.S. growth. After posting record highs in September in the aftermath of Hurricane Katrina, falling energy costs have been a relief for manufacturers.
A global Purchasing Managers Index (PMI), compiled by J.P. Morgan from national and regional polls of thousands of companies worldwide, slipped to 54.0 in December from November's 54.6, but was above a reading of 53.6 a year ago.
A reading above 50 means that the manufacturing sector is expanding.
"December data indicated that global manufacturing operating conditions continued to improve at a solid pace," J.P. Morgan said in a statement. "However, the PMI has fallen in each of the past two months, suggesting that the current uptick in global manufacturing growth is losing momentum," it said.
In the United States, factory growth cooled to its slowest level prior to Katrina with declines in new orders, output and exports, according to a survey released by the Institute for Supply Management released last Tuesday.
The ISM manufacturing index, which is monitored by Federal Reserve, fell to 54.2 in December from 58.1 in November.
The latest reading, the lowest in five months, was below analysts' forecast of 57.5 and year-ago's 57.3.
If U.S. factory growth continues to slow, it could force the Fed to stop raising short-term interest rates to prevent a slowdown of the overall economy, analysts said.
"The issue for 2006 will be momentum. So far the expansion has been able to withstand shocks such as rising energy prices," said Alan Gayle, a managing director at Trusco Capital Management in Atlanta. "A slower ISM number is consistent with an economy likely to slow over the coming months and quarters."
The market has widely expected that Fed will raise interest rates by a quarter-percentage point at its next policy meeting, which marks the end of Alan Greenspan's tenure as Fed Chairman. The move would be the 14th increase since June 2004, and send the Fed's short-term rate target to 4.50 per cent.
While U.S. factories showed slower growth, their Japanese and euro zone counterparts improved further. Both regions have struggled to generate much growth in recent years.
On the other hand, surveys in Britain and China showed manufacturing growth remaining relatively weak.
The Japanese survey, published last week, showed a pickup in orders from overseas, particularly China, as well as robust domestic spending on investment and consumer goods, taking manufacturing expansion to a two-year high.
The Japanese index rose to 55.7, the highest reading since December 2003 and up from 55.3 in November, while the new orders index, a barometer of future demand that combines goods orders from home and overseas, hit 58.8 -- a 23-month high.
The euro zone survey published last Tuesday showed the sector expanding at its fastest overall pace since August 2004, production and new orders both hitting 17-month highs and companies creating more jobs than they shed on a monthly basis for the first time since May 2001.
The overall euro zone PMI rose to 53.6 in December from 52.8 in November, while Italy's PMI hit a five-year high.
The euro zone data lent support to expectations that the European Central Bank will raise rates further after an initial rise in early December to 2.25 per cent, from historic lows of 2.0 per cent.
But in Britain, the main index inched up to 51.1 from 51.0 in November while employment levels continued to fall and price pressures grew, suggesting official interest rates will remain steady for now at 4.5 per cent although most analysts predict the next move will be down.
The China index rose to 50.1, buoyed by new export orders, from 49.8 in November, when it slipped below 50 for the first time in the 21-month history of that survey.