U.S. Taking Steps Toward Recovery, Data Show

The nation is slowly limping its way out of the recession, according to new economic data, as the housing market stabilizes, the industrial sector continues to struggle and inflation appears contained.

A Commerce Department report released yesterday showed that construction of single-family homes rose more than expected in May, as did building permits, which are used to gauge future building activity. Analysts saw the increase in construction, which hit a record low in April, as an early sign that the three-year-old housing slump is getting closer to bottoming out, although home prices are likely to keep falling for some time.

A separate report released by the Fed yesterday showed that manufacturers, already operating at record low levels in April, cut back production in May for a seventh straight month. While not encouraging in the short term, the cutbacks mean manufacturers are getting closer to bringing production in line with demand, a prerequisite for growth.

"Everything we had today supports the notion that economic activity will rise in the third quarter," Wachovia economist Mark Vitner said.

The Fed also reported yesterday that the nation's capacity utilization -- the level of actual activity compared with maximum capability -- fell from 69 percent in April to 68.3 percent in May. A reading closer to 80 percent is the norm in a healthy economy.

Industrial production and capacity utilization are among the key indicators Fed policymakers track as they plot their next steps in fighting the downturn.

Bleak economic conditions in March prompted the Fed to announce plans to purchase an additional $1.2 trillion of long-term Treasurys and mortgage-related securities. The purchases helped drive down consumer borrowing costs, thus stimulating growth.

But as the recession has shown signs of loosening its grip, investors have begun selling off long-term Treasurys and returning to stocks, which in turn has pushed up mortgage rates. A steep enough increase in rates could choke off a housing market recovery and, more broadly, stifle the economy.

Some experts have suggested that the Fed could push rates down again by purchasing more government debt. But doing so could fuel fears of inflation.

In recent weeks, Fed leaders have walked a fine line, saying recent signs of "green shoots" don't warrant further intervention, but that it's too early to remove the money the central bank has injected to shore up the financial system. Fed Chairman Ben S. Bernanke has countered inflation fears by arguing that weak demand and rising unemployment are likely to keep prices and wages from rising.

Another report, issued by the Labor Department yesterday, appeared to bolster that argument. Wholesale prices inched up less than expected. Leaving out food and energy prices, which can be volatile, the core producer price index fell 0.1 percent, compared with analysts' expectations of a 0.1 percent increase.

During the past 12 months, wholesale prices have dropped by 5 percent, the largest margin in nearly 60 years.