US industrial rally gives markets a lift

Shares on both sides of the Atlantic surged to year highs yesterday as traders shrugged off warnings from world leaders about global terrorism and focused on signs of an industrial recovery in the world's largest economy.

The Dow Jones industrial average powered up 150 points to breach the critical 9,000-point mark at lunchtime after new figures showed that the cheap dollar had arrested the decline in US manufacturing.

In London, the FTSE 100 ended 2% higher at 4,129.3 points, the first time the leading index has finished above 4,100 points since early December.

Analysts said the cheaper dollar was laying the foundations for America's industrial recovery, after the Institute for Supply Management said its May index of manufacturing rose to 49.4 from 45.4 in April, beating economists' forecasts for a rise to 48.6.

Norbert Ore, chairman of the ISM manufacturing business survey committee, said the rebound in both new orders and production was very positive.

"We're coming back out of the doldrums in this post-war period," he said.

There was no sign of a postwar bounce back for British industry, despite the slide in sterling. Industry contracted for the sixth month in a row, according to the latest snapshot from the Chartered Institute of Purchasing and Supply, raising fears that manufacturing may now be too weak to take advantage of a more competitive currency.

Reports of production lines standing idle were "widespread", according to the institute, with weak order books and falling output dragging the overall activity index down from 48.6 to 48.1 over the month, well below the 50 mark which indicates the sector is expanding.

"These are desperately disappointing figures, suggesting that the pound's fall against the euro has been of little benefit to exporters so far, and that there has still been little or no improvement in the industrial sector following the ending of the war in Iraq," said Martin Essex, senior economist at Capital Economics.

The CIPS reported that export orders also shrank for the fourth month in succession in May and faster than during April.

Evidence of why firms are struggling to lift output despite the weaker pound came from a separate survey of manufacturing in Europe which showed an even sharper contraction than in Britain. The eurozone activity index fell to 46.8 last month from 47.8 in April.

"The decline in export orders, and the severe fall in the eurozone PMI to its lowest level for 16 months, again highlighted the major problem facing UK manufacturers: anaemic global demand," said Ross Walker, UK economist at the Royal Bank of Scotland.