By Lucia Mutikani
WASHINGTON, Sept 1 (Reuters) - If the revival in U.S. manufacturing is going to last, consumers will have to start buying the goods that are now starting to roll out of factories.
The Institute for Supply Management said on Tuesday that U.S. factory activity expanded for the first time in 18 months in August, confirming trends observed in regional surveys.
There is no doubt that the U.S. manufacturing recession is over, according to most analysts, but recent activity has been spurred by a need to restock depleted inventories and weak demand is seen ahead owing to high unemployment.
"This is certainly expansion for the manufacturing sector. There is a lot of inventory correction and adjustment going on, but the challenge is to figure out what final demand is over time," said John Silvia, chief economist at Wells Fargo in Charlotte, North Carolina.
The U.S. manufacturing sector, which accounts for about 12 percent of the nation's economic activity, slipped into recession in August 2007, several months before the broader economy, according to the Manufacturers Alliance/MAPI.
While the recession in the broader economy may well be over, unemployment is likely to continue to mount for several months, adding to the stress in household finances and undercutting consumer spending, usually the main driver of the economy.
"Recovery is going to be modest for the next half year. I don't think you will see an upturn in consumer spending until the labor market recovers, which will be sometime mid-next year," said David Huether, chief economist at the National Association of Manufacturers.
SIGNS OF IMPROVING DEMAND
However, analysts said there have been signs of improvement in demand for manufactured goods, noting that supplier deliveries and price indexes rose significantly in the ISM survey in August.
"Rising supplier price pressure confirms that demand is firming ... but we caution against over optimism about the pace of the recovery," said Daniel Meckstroth, chief economist at the Manufacturers Alliance/MAPI.
While the manufacturing recovery was partially driven by a surge in auto production after the government's "cash-for-clunkers" scheme sparked a jump in demand for vehicles, other segments also showed strong activity.
Analysts said this indicated the recovery was broad-based and would be sustained beyond the auto incentives, which ended last week. They were encouraged by the jump in the ISM new orders index and the production measure which rose to five-year highs.
Even with the rise in output, inventories continued to decline, with the gap between the stock of unsold goods and orders reaching its widest point since 1975, another hint that the turnaround in activity would likely be sustained.
"Purchasing managers will be hesitant to replenish their stockpiles until they actually see or at least are confident in stronger demand that they view as sustainable," said Stephen Stanley, chief economist at RBS in Greenwich, Connecticut.
"Once firms reach that point, not only will they restock, but they should also begin to unleash pent-up hiring and capital spending. In our view, if or when we get to that point, the recovery will have crossed the point of no return."