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Workers at a Daimler AG factory in GermanyDoug Saunders

Manufacturing is emerging as the unlikely driver of the global recovery.

Factories are ratcheting up output in the United States, Europe and elsewhere as suddenly more confident consumers and businesses resume buying after the worst recession since the 1930s.

The latest evidence: new orders logged by U.S. factories. Orders jumped unexpectedly at the end of last year, paced by higher demand for items such as computers, household appliances, furniture and defence products, the U.S. Commerce Department reported Tuesday. After falling in October, orders bounced back 0.7 per cent in November, notching the largest gain in eight months.

The report echoes similarly positive news from Europe, where manufacturing activity rose for a 15th consecutive month in December, according to the Markit/CIPS Euro Zone Purchasing Manufacturers Index. The index, which tracks activity in the 16 euro zone countries, showed strong growth in Germany, France and even Britain, where activity grew at its fastest pace in 16 years.

The manufacturing reports suggest two things: The global economic recovery is regaining some of the momentum it lost last summer, and rock-bottom interest rates are finally having an impact on buying behaviour.

Manufacturing has long been seen as a withering segment of advanced economies, but the latest readings provide encouragement that the sector is now contributing to a gradual rebound. Many economists are upgrading their forecasts for several of the world's leading economies, including the United States.

"We are seeing stronger momentum in consumption, and investment in software and equipment is picking up," Toronto-Dominion Bank economist Martin Schwerdtfeger said. "All that points to stronger growth in the fourth quarter and this year than we were expecting just two to three months ago."

Mr. Schwerdtfeger pointed out that manufacturing is now creating a greater share of new U.S. jobs than its relative contribution to economic growth.

In the minutes from its Dec. 14 policy meeting, released Tuesday, the U.S. Federal Reserve Board listed manufacturing as one of the sectors of the American economy that have shown "particular signs of strength" since the Fed's November meeting.

Many economists now estimate that the U.S. economy grew at a rate of nearly 3 per cent in 2010. And faster growth is likely at least in the first half of this year.

In a report last week, JPMorgan Chase & Co. economists Bruce Kasman and David Hensley said they're seeing clear evidence of "building global growth momentum" in the recent data.

"With incomes rising and confidence in recovery building, there are good reasons for spending to lift from these depressed levels," Mr. Kasman and Mr. Hensley concluded.

The caveat, of course, is that manufacturing represents a much smaller share of economic activity in the U.S., Canada and Europe than it once did. For example, manufacturing makes up just 11 per cent of U.S. gross domestic product.

And until other sectors come to life, including the all-important service industry, the economy is unlikely to boom and unemployment will remain high.

The manufacturing rebound also remains elusive in Canada, where the strong loonie is making exports less attractive in the global marketplace.

"Canadian manufacturers are still struggling to deal with the strong dollar," Mr. Schwerdtfeger acknowledged.

Financial volatility in Europe and strong commodity prices make the Canadian dollar a sanctuary for many investors. That's great for Canadian purchasing power in the world, but makes it tough for many manufacturers, who have long relied on a cheap Canadian dollar to make export sales.

Economists also warn that beyond Germany, the strength of the European recovery remains shaky. Many countries face the prospect of deep fiscal cuts this year and beyond. That will limit the ability of consumers and businesses to sustain their spending.

Mr. Schwerdtfeger said the outlook for Germany is still "very positive" thanks to strong exports of manufactured goods to emerging markets, and a now-growing domestic demand from businesses and consumers. "For the rest of the euro zone, the outlook is dimmer," he said.

Europe's woes are among the reasons Fed chairman Ben Bernanke and his officials aren't eager to turn off the easy money tap just yet.

Fed officials expect U.S. unemployment will stay too high - and inflation too slow - "for some time,'' and they listed a number of downside risks to the recovery, such as a more protracted housing slump and potential spillover should the banking and debt problems in Europe get worse, according to the minutes.

As a result, the Fed isn't yet in any mood to tinker with the controversial program it launched in November to buy $600-billion (U.S.) in bonds by the end of June to keep long-term borrowing costs down and spur more spending throughout the economy.

"While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program," the minutes said.

And while longer-term borrowing costs were actually rising as policy makers met, the minutes suggest most officials at the meeting believed that without the bond purchases the rates would be significantly higher.

"The commitment may be a little stronger than some people believe," said Michael Gregory, a seasoned Fed watcher at BMO Nesbitt Burns Inc. "So far, the two themes that have unfolded - the backup in yields and the improving prospects and improving momentum - haven't deterred them, and probably won't."



With files from Jeremy Torobin

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