Tuesday, April 02, 2002

Report holds hope for worried skeptics



By Jeannine Aversa
The Associated Press

        WASHINGTON — The notion that the country's economic revival has real staying power gained believers Monday when the latest snapshot of the economy showed manufacturing growing for the second straight month and construction spending recording its largest increase in a year.

        The Institute for Supply Management, formerly known as the National Association of Purchasing Management, reported that its index of business activity rose to 55.6 in March, its best reading in two years, from 54.7 percent in February. An index above 50 signifies growth in manufacturing, while a figure below 50 shows contraction.

        It was the first time that the index flashed back-to-back growth signals above the 50 mark since June-July 2000, right before the manufacturing slump began.

        “There should be no doubt that manufacturing has turned around sharply,” economist Clifford Waldman of Waldman Associates said. “I think we have ourselves a pretty broad economic recovery.”

        That's good news for the nation's beleaguered manufacturing sector, which was suffering even before the country fell into recession in March 2001. Hardest hit by the sour economy, factories throttled back production and laid off hundreds of thousands of workers.

        But recent economic reports suggest that factories are starting to boost production, particularly as companies have gotten rid of excess piles of unsold goods, and that bodes well for stronger economic growth in the coming months, economists said.

        In another report, spending on construction projects grew by a bigger-than-expected 1.1 percent in February as builders took advantage of Americans' strong demand for new homes, the Commerce Department said. Many analysts were forecasting a smaller, 0.6 percent rise.

        Virtually all the strength came from increased spending on residential construction, which rose 3.5 percent, especially single-family homes.

        Economists said the residential construction market should provide a nice boost to economic growth for the first quarter of this year.

        Monday's reports should provide sufficient evidence to convince doubting Thomases that the rebound in both the national economy and in manufacturing is real and not an illusion, economists said.

        The reports also suggest that the economy is growing strong enough so as not to slip back into a recession, a fear among some analysts.

        “A factory rebound is clearly under way, and I suspect that it will be quicker and stronger than many expect,” said Ken Mayland, president of ClearView Economics.

        “I'm a believer of the spring theory of the economy. You compress it a little, it bounces back a little. You compress it a lot, it snaps back hard. Factories suffered their worst setback in two decades, which sets them up to come back with gusto,” Mayland said.

        In the construction report, spending on new single-family homes rose by 3.1 percent in February, the biggest increase since December 1993.

        Despite the recession, home sales hit record highs last year. Buyers snapped up both new and existing homes, motivated not only by low mortgage rates but also by increases in home values, especially as the stock market swooned.

        Even with mortgage rates creeping up, economists still believe home sales will remain solid this year, helping along the economic recovery.

        However, Monday's report showed that spending on commercial projects, including industrial complexes, office buildings and hotels, declined by 3 percent in February. Spending on big government projects, including highways, dipped by 0.5 percent.

        The 1.1 percent increase in construction spending in February matched the rise recorded in February 2001. It marked the third straight month in a row that construction spending went up.

        To rescue the economy from recession, the Federal Reserve slashed interest rates 11 times last year, pushing some interest rates down to the lowest levels seen in four decades.

        The Fed, citing signs of a turnaround, opted in January and in March to hold interest rates steady, meaning businesses and consumers will be able to continue to enjoy low borrowing costs to finance such things as construction projects and big-ticket purchases.

        Many economists believe the Fed may begin to boost short-term interest rates as early as May or June. But others aren't so sure. They wonder whether consumers will continue to spend heartily and if businesses will boost capital spending, things that would help fuel the rebound.

       



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