A machine that makes bubble wrap padded envelopes is pictured at the Wrap-Tite manufacturing facility in Solon, Ohio July 13, 2012.

NEW YORK | Wed Jan 2, 2013 2:48pm EST

NEW YORK (Reuters) - U.S. manufacturing ended 2012 on an upswing despite fears about the "fiscal cliff," data showed on Wednesday.

U.S. factories returned to growth in December after contracting the previous month, the Institute for Supply Management said.

Its index of national factory activity rose to 50.7 up from 49.5 in November, narrowly beating the consensus forecast in a Reuters poll. The ISM index had fallen to a 40-month low in November.

"What is interesting in this report is that you would think the negative headlines surrounding the fiscal cliff would have put pressure on manufacturing," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.

ISM's employment index rose to 52.7 from 48.4 in November, while its forward-looking new orders component kept at 50.3.

A separate measure of manufacturing also showed growth.

Financial data firm Markit's U.S. Manufacturing Purchasing Managers Index picked up to 54.0 from 52.8 in November. This was its highest point since May on a final basis despite just missing its preliminary estimate of 54.2.

"With recent indications that growth is also picking up in other key economies around the world, notably in emerging markets such as China and Brazil, and that the euro zone's economic crisis is easing, U.S. companies should benefit as stronger demand lifts exports in early 2013," said Markit Chief Economist Chris Williamson.

A rise in new orders fueled the faster growth, as one in five companies reported an increase. The Markit index's new orders component rose to 54.7 from 53.6 in November, its quickest increase since April.

The growth in U.S. manufacturing came in the face of fears late last year over the "fiscal cliff" of tax hikes and spending cuts, which would have kicked in at the start of 2013, risking a new U.S. recession.

Lawmakers struck a deal late on Tuesday, avoiding income tax hikes for most Americans and delaying the spending cuts for two months.

U.S. stock prices surged at the open on the congressional action, while yields on U.S. government debt rose.

"Now that Congress has come to an agreement. ... We expect that new orders and overall activity in the sector will accelerate. However, we also expect that growth in the first quarter will be slow due to continued uncertainty over spending cuts and the debt ceiling," said Thomas Simons, vice president and money market economist at New York brokerage Jeffries, in a note.

Despite Tuesday's deal, Congress still must debate how to handle the automatic spending cuts and resolve differences over the federal debt ceiling which could result in a new round of political wrangling.

The deal is in line with what many financial firms on Wall Street and around the world have been expecting, suggesting forecasts for economic growth of around 1.9 percent for 2013 would likely hold.

Even as manufacturing grew, uncertainty remained for smaller businesses.

Borrowing by small U.S. businesses rose marginally in November, as the Thomson Reuters/PayNet Small Business Lending Index - which measures the overall volume of financing to small U.S. companies -- rose to 108.3 from a downwardly revised 107 in October, PayNet said.

"Small businesses were waiting to see what is happening with Washington. ... They were waiting for more consumer activity to emerge, really watching the front door for new sales to emerge and it doesn't look like any major new influx of sales came in - they have really been on hold," PayNet founder Bill Phelan said.

(Reporting by Gabriel Debenedetti; Additional reporting by Steven C. Johnson, Chris Reese, Julie Haviv, Jason Lange; Editing by Neil Stempleman)

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A man walks past the U.S. Capitol Building in Washington December 17, 2012.

WASHINGTON | Wed Jan 2, 2013 4:52pm EST

WASHINGTON (Reuters) - Washington has steered clear of severe austerity measures for now, reducing the risk of recession, but a clutch of U.S. tax hikes will nevertheless be a drag on economic growth this year.

The U.S. Congress approved a deal late on Tuesday to scale back some $600 billion in scheduled tax hikes and government spending cuts known as the "fiscal cliff."

Analysts said the package at least marked a temporary reprieve for the economy, and investors charged into U.S. stocks, pushing the Standard & Poor's 500 up 2.5 percent on Wednesday.

However, the legislation, which is expected to be signed into law soon by President Barack Obama, will raise taxes on most Americans through a hike in the payroll tax used to fund Social Security pensions for the elderly.

Economists say the U.S. economy would likely grow much more quickly if the government was not raising taxes.

The payroll tax hike alone - which comes from the expiration of stimulus measures enacted to fight the 2007-09 recession - could push the average household tax bill up by about $700 this year, according to estimates from the Tax Policy Center, a Washington think tank.

That will likely reduce consumer spending and subtract about three quarters of a percentage point from economic growth, said Joseph LaVorgna, an economist at Deutsche Bank in New York.

The package will also raise income tax rates for households making over $450,000 a year, although rates will remain at 2012 levels for everyone else.

The other modest tax hikes, including a tax on wealthy households to help pay for Obama's 2010 healthcare reform law, could shave another quarter of a point from growth.

"We are still getting some fiscal drag this year," LaVorgna said.

Even so, the tenor of the deal was widely anticipated by economists in financial centers like Wall Street, and appears to support forecasts for economic growth of around 2 percent this year.

Barclays Capital said it was holding its growth forecast for this year at 2.1 percent.

A Reuters poll of analysts in December produced a median forecast for 1.9 percent U.S. economic growth in 2013.

"There seems to be a collective sigh of relief," strategists at Brown Brothers Harriman wrote in a note to clients. "The full force of the U.S. fiscal cliff - (which) could have dragged the world's largest economy into a recession - has been averted."

The Congressional Budget Office had estimated that completely running over the fiscal cliff would have caused the economy to contract 0.5 percent this year. The full brunt of the cliff would have hit the average U.S. household with about an additional $3,500 in taxes this year, according to the Tax Policy Center.

Still, U.S. lawmakers only agreed to delay scheduled cuts on government spending on the military, education and other areas for another two months.

Many economists think ongoing talks in Congress will eventually lead these spending cuts to be put off until next year, presumably once lawmakers reach a deal to reduce spending over the longer term while granting the government authority to increase the national debt.

Then again, they might not reach a deal, and the planned spending cuts would then cut deeply into economic growth in the second half of the year.

"While we retain our 2013 GDP forecast, we also retain the view that fiscal policy presents downside risks to growth," analysts at Barclays said in a research note.

Some economists noted that tax policy now looks more stable for the majority of Americans, removing some of the uncertainty that may have held back spending by consumers and business in recent months.

At the same time, with an axe still hanging above billions of dollars in government spending, many businesses are likely to remain cautious.

Analysts say financial markets are likely to remain on tenterhooks until Congress raises the nation's $16.4 trillion debt ceiling, which the U.S. Treasury confirmed had been reached on Monday.

The government likely will need to raise the debt ceiling by February or March to remove the risk albeit remote, of the country defaulting on its debt. Such an extreme scenario would likely make it more expensive for governments and companies alike to borrow money, hurting the economy.

"We have some more certainty, but there are still quite a few questions left to be resolved," said Dana Saporta, an economist at Credit Suisse.

(Additional reporting by Jonathan Spicer in New York; Editing by Leslie Adler)

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1 of 12. Speaker of the House John Boehner (R-OH) walks with House Majority Leader Rep. Eric Cantor (R-VA) to a meeting with House Republicans on the ''fiscal cliff'' budget deal on Capitol Hill in Washington on January 1, 2013. Washington's last-minute scramble to step back from a ''fiscal cliff'' ran into trouble on Tuesday as Republicans in the House of Representatives balked at a deal to avert a budget crisis.

WASHINGTON | Thu Jan 3, 2013 12:44am EST

WASHINGTON (Reuters) - President Barack Obama and congressional Republicans face even bigger budget battles in the next two months after a hard-fought "fiscal cliff" deal narrowly averted devastating tax increases and spending cuts.

The agreement, approved late on Tuesday by the Republican-led House of Representatives and signed by Obama on Wednesday, was a victory for the president, who had won re-election in November on a promise to address budget woes, partly by raising taxes on the wealthiest Americans.

But it set up potentially bruising showdowns over the next two months on spending cuts and an increase in the nation's limit on borrowing. Republicans, angry the fiscal cliff deal did little to curb the federal deficit, promised to use the debt-ceiling debate to win deep spending cuts next time.

Republicans believe they will have greater leverage over Democrat Obama when they must consider raising the borrowing limit in February because failure to close a deal could mean a default on U.S. debt or another downgrade in the U.S. credit rating. A similar showdown in 2011 led to a credit downgrade.

"Our opportunity here is on the debt ceiling," Republican Senator Pat Toomey of Pennsylvania said on MSNBC. "We Republicans need to be willing to tolerate a temporary, partial government shutdown, which is what that could mean."

But Obama and congressional Democrats may be emboldened by winning the first round of fiscal fights when dozens of House Republicans buckled and voted for major tax hikes for the first time in two decades.

"We believe that passing this legislation greatly strengthens the president's hand in negotiations that come next," House Minority Leader Nancy Pelosi told NBC in an interview to air on Thursday.

Obama, who is vacationing in Hawaii, signed the legislation late on Wednesday, the White House said.

"We received the bill late this afternoon, and it was immediately processed. A copy was delivered to the president for review. He then directed the bill be signed by autopen," a senior administration official said. An autopen is an automatic pen with the president's signature.

Deteriorating relations between leaders in the two parties do not bode well for the more difficult fights ahead. Vice President Joe Biden and Republican Senate leader Mitch McConnell had to step in to work out the final deal as the relationship between House Speaker John Boehner and Obama unraveled.

Senate Majority Leader Harry Reid also drew the ire of Boehner, who told Reid in the White House to "Go fuck yourself" after a tense meeting last week, aides said. His remark came after the Democrat accused Boehner of running a "dictatorship" in the House.

Bemoaning the intensity of the fiscal cliff fight, Obama urged "a little less drama" when the Congress and White House next address budget issues like the government's rapidly mounting $16 trillion debt load. He vowed to avoid another divisive debt-ceiling fight before the late-February deadline for raising the limit.

"While I will negotiate over many things, I will not have another debate with this Congress about whether or not they should pay the bills they have already racked up," Obama said before he headed to Hawaii to resume an interrupted vacation.

NOT TIME TO CELEBRATE

Analysts warned that might not be so easy. "While the markets and most taxpayers may breathe a sigh of relief for a few days, excuse us for not celebrating," said Greg Valliere, chief political strategist at Potomac Research Group.

"We have consistently warned that the next brawl represents a far greater threat to the markets - talk of default will grow by February, accompanied by concerns over a credit rating downgrade," he said.

Rating agencies Moody's Investors Service and Standard & Poor's said the "fiscal cliff" measure did not put the budget on a more sustainable path. The International Monetary Fund said raising the debt ceiling would be a critical move.

"More remains to be done to put U.S. public finances back on a sustainable path without harming the still fragile recovery," said Gerry Rice, a spokesman for the IMF.

Financial markets that had been worried about the fiscal cliff showdown welcomed the deal, with U.S. stocks recording their best day in more than a year. The S&P 500 achieved its biggest one-day gain since December 20, 2011, pushing the benchmark index to its highest close since September 14.

The debate over "entitlement" programs is also bound to be difficult. Republicans will be pushing for significant cuts in government healthcare programs like Medicare and Medicaid for retirees and the poor, which are the biggest drivers of federal debt. Democrats have opposed cuts in those popular programs.

"This is going to be much uglier to me than the tax issue ... this is going to be about entitlement reform," Republican Senator Bob Corker of Tennessee said on CNBC.

"Now that we have this other piece behind us - hopefully - we'll deal in a real way with the kinds of things our nation needs to face," he said.

The fiscal cliff crisis ended when dozens of Republicans in the House relented and backed a bill passed by the Democratic-controlled Senate that hiked taxes on household income above $450,000 a year. Spending cuts of $109 billion in military and domestic programs were delayed for two months.

Economists had warned that the fiscal cliff of across-the-board tax hikes and spending cuts would have punched a $600 billion hole in the economy this year and threatened to send the country back into recession.

Dozens of House Republicans reluctantly approved the Senate bill, which passed by a bipartisan vote of 257-167 and sent it to Obama to sign into law.

Peter Huntsman, chief executive of chemical producer Huntsman Corp, said the vote did little to reduce the U.S. budget deficit and would hinder growth.

"We haven't even begun to address the basic issues behind this," Huntsman told Reuters. "We haven't fixed anything. All we've done is addressed the short-term pain.

The vote underlined the precarious position of Boehner, who will ask his Republicans to re-elect him as speaker on Thursday when a new Congress is sworn in. Boehner backed the bill, but most House Republicans, including his top lieutenants, voted against it.

The Ohio congressman also drew criticism on Wednesday from his fellow Republicans for failing to schedule a House vote on a bill passed by the Senate that would provide federal aid to Northeastern states hit by the storm Sandy.

(Additional reporting by Susan Heavey, Richard Cowan in Washington and Gabriel Debenedetti and Ernest Scheyder in New York, Editing by Alistair Bell, Peter Cooney and Mohammad Zargham)

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U.S. Vice President Joe Biden (L) and President Barack Obama (R) depart following Obama's remarks after the House of Representatives acted on legislation intended to avoid the ''fiscal cliff,'' at the White House in Washington January 1, 2013. The Republican-controlled House backed a tax hike on the top U.S. earners shortly before midnight on Tuesday, ending weeks of high-stakes budget brinkmanship that threatened to spook consumers and throw financial markets into turmoil.

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NEW YORK | Thu Jan 3, 2013 7:57am EST

NEW YORK (Reuters) - Planned layoffs at U.S. firms fell in December for the first time in four months, while the overall job-cut total in 2012 was the lowest since 1997, a report showed on Thursday.

Employers announced 32,556 job cuts last month, the second lowest monthly total of 2012 and down 43 percent from 57,081 in November, according to the report from consultants Challenger, Gray & Christmas, Inc. In 2012, the only month with a lower job-cuts tally was August, with 32,239.

December's job cuts were also down 22 percent from the 41,785 seen a year ago.

During 2012, employers announced 523,362 cuts, down 14 percent from the 606,082 job cuts announced in 2011 and the lowest level since 1997 when employers announced 434,350 cuts.

"We saw a few spikes in monthly job cuts in 2012 and there were some significant mass layoffs that definitely reminded us that not every industry is enjoying the fruits of recovery. However, the overall pace of downsizing was at its slowest since the end of the recession," said John A. Challenger, chief executive officer of Challenger, Gray & Christmas.

"In fact, we have not seen this level of job cutting since before the dot-com collapse and subsequent 2001 recession," Challenger said in a statement.

One of the significant mass layoffs of last year was made in December by Citigroup Inc (C.N), which announced 11,000 job cuts early in the month. The bank accounted for the majority of the 11,355 job cuts announced last month in the financial sector, which was the top job-cutting sector in December.

The leading job-cut sector of 2012 was the computer industry, which announced 46,164 layoffs last year, up 215 percent from 14,677 job cuts in the computer industry in 2011.

The most dramatic decline in job cuts came in the government sector, which announced 19,128 layoffs in 2012, down 90 percent from 183,064 announced job cuts in 2011.

However, the fall in job cuts in December may not carry over into early 2013.

"Historically, January is, on average, the biggest job-cut month of the year, and several sectors, including computer, financial services, consumer products, transportation and aerospace and defense are at risk due to a high potential for reduced spending by consumers, businesses and government in 2013," Challenger said.

The report comes a day ahead of the key jobs report, which is forecast to show 150,000 new U.S. jobs were added in December, up slightly from 146,000 new jobs in November.

(Reporting by Chris Reese; Editing by Chizu Nomiyama)

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Job seekers stand in line to meet with prospective employers at a career fair in New York City, October 24, 2012.

WASHINGTON | Thu Jan 3, 2013 8:32am EST

WASHINGTON (Reuters) - The number of Americans filing new claims for unemployment benefits rose last week, but the data continues to be too distorted by the holidays to offer a clear read of labor market conditions.

Initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 372,000, the Labor Department said on Thursday. The prior week's figure was revised to show 12,000 more applications than previously reported.

Claims data reported for the week ended December 22 had been artificially depressed by the holidays, which resulted in data for 19 states being estimated.

A Labor Department official said claims data for nine states, including California and Virginia, had been estimated last week because of the Christmas and New Year holidays. This suggests the numbers are subject to revisions next week.

The four-week moving average for new claims, a better measure of labor market trends, rose 250 to 360,000. The claims data has no bearing on December's employment report, scheduled for release on Friday.

Employers are expected to have added 150,000 jobs to their payrolls last month, little changed from 146,000 in November, according to a Reuters survey of economists.

Job gains in the first 11 months of last year averaged about 151,000 per month, not enough to significantly lower unemployment. Employers' hesitancy to ramp up hiring had been blamed on the so-called fiscal cliff, a combination of sharp government spending cuts and higher taxes.

Although Congress this week approved a deal to avoid the fiscal cliff, the budget problems are far from resolved. That could continue to cast a shadow of uncertainty and hurt job growth.

The claims report showed the number of people still receiving benefits under regular state programs after an initial week of aid increased 44,000 to 3.25 million in the week ended December 22.

(Reporting By Lucia Mutikani; Editing by Andrea Ricci)

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