Government data show an ongoing but uneven economic recovery

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By Ylan Q. Mui
Washington Post Staff Writer
Tuesday, February 2, 2010

In another sign of the nation's uneven economic recovery, new data released Monday showed manufacturing activity at its highest level in more than five years while consumer demand continued to moderate.

The Institute for Supply Management reported that its index of manufacturing activity hit 58.4 points in January, the sixth consecutive monthly increase and the best performance since August 2004. A reading above 50 indicates that the sector is expanding. Thirteen of the 18 manufacturing categories showed growth last month, with apparel leading the way.

"This month's report provides significant assurance that the manufacturing sector is in recovery," said Norbert J. Ore, chairman of the ISM manufacturing business survey committee.

Wall Street welcomed the results, with stocks enjoying their biggest one-day gains so far this year. The Dow Jones industrial average jumped 1.2 percent, or 118.20 points, to 10,185.53, while the broader Standard & Poor's 500-stock index rose 1.4 percent, or 15.32 points, to 1089.19. The tech-heavy Nasdaq composite index increased 1.1 percent, or 23.85 points, to 2171.20.

Economists cautioned that the spike looks to be temporary. Manufacturers dramatically reduced production during the first quarter of last year in response to weak consumer demand. But the pullback was not as severe as expected, according to Citigroup economist Steven Wieting, and now manufacturers are working fast to replenish inventories.

"They planned for a much worse downturn than has actually occurred," he said. "This is what I'm calling the snap-back phase in activity."

Already there are signs that the pace of growth may begin to slow in the coming months: Though the ISM index for production jumped 6.5 points in January from the previous month, the index for new orders rose only 1.1 points. In addition, the ISM report does not reflect the full impact of small businesses, said Ian Shepherdson, chief U.S. economist for High Frequency Economics. The National Federation of Independent Business, a trade group for the sector, reported that its index of business activity in December fell 0.3 points.

The manufacturing sector may be "firmly into boom territory, but the economy is not there and won't be going there, either," Shepherdson said.

That is partly because consumer demand remains sluggish, as evidenced by government data released Monday. Personal spending rose 0.2 percent in December after November's gain was revised upward to 0.7 percent, the Commerce Department reported.

The December increase represents the third consecutive monthly gain in spending, but it was the smallest rise of the fourth quarter. Stronger demand in October and November helped fuel the 5.7 percent increase in the gross domestic product during the fourth quarter, but some economists think that spending has begun to taper off.

The savings rate also rose in December, to 4.8 percent of disposable income from 4.5 percent in November. Total income rose 0.4 percent. Shepherdson said the soft finish to the year indicates that "even a repeat of the modest [fourth-quarter] gain will be a struggle."

Meanwhile, the Commerce Department reported that construction spending in December dropped 1.2 percent from the previous month, significantly worse than estimated. Residential construction slid 2.7 percent, and commercial construction rose 0.8 percent.

But economists questioned those figures, especially as the Commerce Department initially revised downward its estimate of October spending, then increased it 2 percent.


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