Domestic manufacturing data remains strong with the December Institute for Supply Management index of 54.2, down from 58.1 in November and more in line with pre-hurricane levels. An index of more than 50 indicates growth. Prices paid by manufacturers moderated to an index of 63 compared to 74 in November. New orders (55.5 in December vs. 59.8 in November) and the production index (57 in December vs. 60.6 in November) also were at levels more typical of mid-cycle activity. Further, industrial production rose 0.6% in December bringing the year up 3.2%, and capacity utilization rose to 80.7% in December elevating the average for last year to 80%. Even construction activity remained solid—up 0.2% in November over October (year-to-date up 9%) with the slight weakness in residential construction offset by a 0.5% gain in non-residential construction and 0.3% gain in government construction (state-level construction was up 0.7%, offsetting a 0.5% decline in activity at the Federal level).

Perhaps the most unanticipated surprise is emerging evidence of improving manufacturing activity overseas. The European manufacturing sector rose at the fastest pace in 16 months as its purchasing managers index rose to 53.2 in December from 52.8 in November beating most expectations. An addition of 110,000 jobs in Germany—the largest gain since the country was unified in 1990—led the European unemployment rate down to 11.2% from 12.6% early last year.

Europe could be the main contributor to potential upside earning surprises for 2006, particularly if the projected weakening of the U.S. dollar materializes as this year unfolds. Moreover, the recent weakness in some industrial sectors of China and India appear to be coming to an end. Only Brazil appears to still be a disaster.

Most industrial sectors are reporting good to robust activity with construction and mining at very strong levels (even without much hurricane spending yet), fluid power orders being very robust, and auto and housing still holding their own. Appliance demand remains decent with orders helped by recently introduced upscale products and new government efficiency requirements for residential air-conditioning beginning in mid-January 2006.

Even the heavy truck market shook off several mediocre months with a very strong 38,700 orders for December, suggesting that this year could be as strong as 2005. There is some softness in the farm sector and concern now has risen over the new wheat crop in the ground due to a shortage of winter moisture. But we caution not to read too much into this as the winter and spring always bring fears—none of which have much impact during the current dormant season for crops.

The bottom line: the industrial sector will still be a great place to be in 2006.

Analyst Eli Lustgarten is senior vice president at Longbow Research, and president of ESL Consultants in St. Louis.

Mittal Steel Co.'s proposed acquisition of European rival Arcelor had one side benefit: it is expected to raise the valuation of steelmaking assets.

The Mittal bid values Arcelor at $560 per metric ton of production, based on 2004 production and enterprise value, Credit Suisse analyst David Gagliano wrote in a report after Mittal launched its bid. In comparison, United States Steel Corp. had been trading at $469 per metric ton of production and Nucor Corp. is valued at $609 per ton.

A merger of the No. 1 and No. 2 steelmakers could be expected to spur another round of mill consolidation, and the U.S. is an attractive market, Gagliano wrote. A combined Mittal/Arcelor enterprise, with capacity of 110 million tons, would exceed the entire U.S. steelmaking capacity. It also would dwarf the next group of competitors, Japan's Nippon Steel Corp. and JFE Steel Corp. and Korea's Posco, each with capacity in the range of 30 million tons, according to the London-based International Iron and Steel Institute (IISI).

U.S. Steel has about 20 million tons of capacity and Nucor, the next largest independent U.S. steelmaker, has just less than that, IISI data shows.

An article in the January issue of Forward magazine, “Supply Chain Lessons,” incorrectly stated production and capacity levels at South Bend, Indiana-based AM General for the HMMWV military vehicle and the Hummer SUV.

The company’s facility in Mishawaka, Indiana, for the military vehicle never built as few as one a day and currently is producing about 50 a day.

AM General’s new 673,000 square foot facility designed to produce Hummer H2 SUVs for the consumer market under an agreement with General Motors Corp. was always slated to produce more than 16 Hummer SUVs per day, the number stated in the article. In fact, the plant’s capacity is 40,000 vehicles a year and it currently is producing about 77 civilian Hummers a day. The corrected article can be viewed online at forward.msci.org.