WASHINGTON - Hopes for the fledgling U.S. economic recovery got a boost Monday from better-than-expected news on manufacturing, construction and contracts to buy homes.
The surprisingly strong readings provided some comfort that the U.S. economy is packing more momentum than assumed going into the end of the year. Still, with jobs scarce, lending tight and consumers wary of spending, it's unclear whether the gains can be sustained as government stimulus programs wind down.
The U.S. Institute for Supply Management's gauge of manufacturing activity grew in October at the fastest pace in more than three years. It was driven by businesses' replenishing of stockpiles, higher demand for American exports and support from the U.S. government's US$787-billion stimulus program.
The ISM index shot up to 55.7 in October, the third straight reading above 50, which signals growth in the sector. It was the highest level since April 2006.
"It clearly looks like we are seeing a turnaround in the manufacturing sector," said David Wyss, chief economist at Standard&Poor's in New York.
Economists cautioned that the manufacturing pattern seen in the past two post-recession recoveries likely will be repeated this time: In each case, early strength in manufacturing, led by companies' restocking of inventories, faded within a few months.
Wyss agrees that the ISM index could dip below 50 in the first quarter of next year. But he thinks that would be a temporary slump and not a sign that the economy was dipping back into recession.
"A bit of a slip in manufacturing would be consistent with a sluggish recovery," he said.
The overall economy, as measured by the gross domestic product, expanded at a 3.5 per cent rate in the July-September quarter. That number provided compelling evidence that the longest recession since the 1930s was ending. Wyss said he expects GDP growth to slow to around 1.7 per cent in the current quarter and to remain sluggish in the first half of next year.
Other economists are more optimistic, with some forecasting that GDP growth could come in around three per cent in the current quarter. They pointed to the government report Monday that construction spending rose a bigger-than-expected a 0.8 per cent in September, fuelled by the strongest jump in home construction in six years. The gain in housing offset continued weakness in construction of office buildings, hotels and shopping centres.
In a third report, the National Association of Realtors said the volume of signed contracts to buy previously occupied homes rose 6.1 per cent in September to a reading of 110.1. That's the highest level since December 2006. And it's more than 21 per cent above a year ago.
The eighth straight monthly gain came as the housing market rebounds from the worst downturn in decades. The improvement has been aided by federal intervention to lower mortgage rates and bring more buyers into the market. For example, the contracts to buy homes rose as buyers scrambled to qualify for a tax credit for first-time buyers that expires at the end of this month. Congress is moving to extend the credit until April 30.
"We think this recovery is sustainable," said Sal Guatieri, an economist at BMO Capital Markets. "We think there is enough government stimulus in place to push the economy forward and manufacturing will be getting support from a weakening U.S. dollar and strength in Asia which will boost exports."
Manufacturing in China, which posted the strongest growth of the world's major economies in the third quarter, expanded for an eighth straight month in October, according to a survey by a government-sanctioned industry group. European surveys also showed growth despite the recent climb by the euro and pound against the dollar. That currency gap makes Europe's exports more expensive.
The expanding signs of a U.S. rebound gave an initial boost to investors on Wall Street Monday, but the rally lost steam on a retreat in financial stocks. The Dow Jones industrial average added about 75 points in late afternoon trading, while broader indexes were mixed.
At the White House, President Barack Obama said the public and private sectors must find more ways to create jobs to continue the recovery. In remarks at the start of a meeting with his economic advisers, Obama credited his stimulus package for recent better economic figures, including the manufacturing boost.
The president said there was still "a long way to go," especially in creating jobs.
The ISM, a trade group of purchasing executives, said its index showed manufacturing employment grew for the first time in 15 months, rising to 53.1 last month from 46.2. But the measure tracking new orders, a signal of future production, slipped in September.
Farm and construction equipment makers Deere&Co. and Caterpillar Inc. said last week that they're adding back a few hundred jobs each. And Greenville, Souh Carolina-based Kemet Corp., which makes parts for electric drive vehicles and alternative energy markets, is adding 113 jobs in the state because of a $15.1 million grant from the Department of Energy that is enabling the company to transfer some manufacturing from Europe to the U.S., said spokesman Dean Dimke.
But layoffs continue. Sun Microsystems Inc. said in October it plans to eliminate up to 3,000 jobs before it's acquired by Oracle Corp.
In October, the ISM said 13 of the 18 manufacturing industries surveyed expanded, led by petroleum and coal production, apparel and furniture. Three industries shrank.
"There's still a lot of caution from our clients," said Richard Zambacca, president of Think Resources, an engineer staffing company in Atlanta. "People are looking for funding."
AP Business Writer Tali Arbel in New York and AP Real Estate Writer Alan Zibel in Washington contributed to this report.