Crisis culprits helping lead recovery

A new home in Leesburg has been sold. Pending home sales rose 6.1 percent in September.
A new home in Leesburg has been sold. Pending home sales rose 6.1 percent in September. (Andrew Harrer/bloomberg News)
By Neil Irwin
Washington Post Staff Writer
Tuesday, November 3, 2009

Two sectors that led the collapse of the economy over the past two years -- manufacturing and housing -- are now emerging as among the biggest drivers of growth, which was underscored by new data published Monday.

Manufacturers expanded in October at their fastest rate in more than three years, according to a survey of purchasing managers. The Institute for Supply Management's index of manufacturing activity rose to 55.7 from 52.6 in September. Numbers above 50 indicate that the sector is expanding, and the index has now been above that level for three straight months.

The nation's factories have been ramping up their assembly lines to keep up with demand after cutting production aggressively over the past year. They have received a boost from businesses moving to replenish inventories, a cycle that typically helps propel the economy out of recession, in addition to government policies such as "Cash for Clunkers" that have helped spur demand for their products.

Separately, the National Association of Realtors said that pending home sales rose 6.1 percent in September, following a 6.4 percent increase in August. That is the latest piece of evidence that home sales activity, while still far below its highs of earlier in the decade, is not merely leveling off but is rising at a steady clip. Construction spending, meanwhile, rose 0.8 percent in September, the Commerce Department said.

Housing has also benefited from government policies as the combination of low prices, low mortgage rates and an $8,000 first-time-home-buyer tax credit have coaxed Americans back into the market for houses.

Sustaining the gains

Taken together, the reports show how two long-depressed sectors of the economy are enjoying something of a rebound. The stock market rose on the news, soaring early in the day before ending Monday with more modest gains. The Dow Jones industrial average rose 77 points on the day, or 0.8 percent, while the broader Standard & Poor's 500-stock index advanced 0.7 percent.

With last week's report that gross domestic product rose at a 3.5 percent annual rate in the third quarter, the open question has been to what degree growth will be sustained, and Monday's manufacturing report was among the first indicators of how the economy held up in October. Tuesday and Wednesday, the Federal Reserve's policymaking committee will meet, and it is all but certain to leave its target interest rate near zero and proceed as planned with winding down its more unconventional programs to keep interest rates low.

The manufacturing recovery is being driven by a confluence of factors. Having cut inventories aggressively, companies must ramp up production to keep pace with demand. And that has been boosted by Cash for Clunkers, which helped clear automobile inventories. The ISM found that 13 of 18 manufacturing sectors were expanding in October.

"You're seeing some legs to the expansion," said Daniel Meckstroth, chief economist for the Manufacturers Alliance. "The rebound was pervasive across most major industries, which suggests this growth should have some staying power."

A return to hiring

In a particularly promising sign, employment at manufacturers swung from contraction to expansion, with that index rising to 53.1 from 46.2. It had been in negative territory for the previous 14 months.

Still, analysts were skeptical that the improved reading on factory hiring reflects any lasting momentum in the job market, as a variety of other indicators point to continued hard times for workers. The Labor Department will report on the October jobs situation on Friday, and forecasters expect a loss of 175,000 jobs and for the unemployment rate to have risen to 9.9 percent from the current 9.8 percent.

Employers cut back on hours as they decreased production over the past year, so many can fulfill rising demand for their products not by hiring new workers, but by having existing employees work more hours.

The positive employment index "is certainly a strong positive indicator, but in some sense it seems too good to be true this early in the recovery," said Bruce McCain, chief investment strategist for Key Private Bank. "There is still a lot of slack in the labor market."

The signs in manufacturing are not universally positive. The number of new orders, a forward-looking indicator, edged down in October, though it remained at levels that indicate expansion.

The improvement in the housing market has also helped manufacturing. An uptick in construction, though modest, has helped increase demand for lumber, carpeting, drywall and other materials that go into houses.

"A lot of areas of sectors are affected by housing," said Meckstroth, "so even policies like the housing credit have an impact on manufacturing."

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