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Archive for Saturday, March 2, 2002

Reports point to recovering economy

March 2, 2002

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— The U.S. economy not only has begun to grow again after last year's slump, but it is apparently doing so far more quickly than even the most optimistic forecasters were expecting just a few weeks ago, according to several economic reports released Friday.

The Institute of Supply Management said that its monthly index that tracks conditions in manufacturing jumped to 54.7 in February, soaring past the break-even point of 50 for the first time in a year and a half. The index had been below 50, indicating a contraction in manufacturing activity, for 18 consecutive months. It registered 49.9 in January.

A surge in both current production and new orders caused the jump in the ISM index. The reading for new orders shot up to its highest level in more than seven years, suggesting that the sharp rise in production is not a flash in the pan, analysts said.

The index probably indicates that industrial production rose in February as firms began placing new orders to slow the record rate at which their stocks of unsold goods have been shrinking. Economists have been predicting that such a swing in inventories would be a major force boosting production and putting the economy back on a solid growth path.

Manufacturing firms' backlog of unfilled orders rose for the first time in two years and deliveries of goods were reported to be slowing down, both signs that factories will be stepping up production again, analysts said.

Meanwhile, the Commerce Department reported that consumer spending increased 0.4 percent in January, signaling that it is likely to be higher in the first three months of this year than it was in the fourth quarter of last year. Many forecasters had expected consumer spending to be flat or down this quarter after it shot up at a 6 percent annual rate late last year. Much of that gain was due to a surge in motor vehicle sales triggered by offers of zero-percent financing from manufacturers.

New car and light truck sales have declined in recent months, but not as much as industry analysts had expected, while other types of purchases have continued to rise at a very healthy pace. After adjustment for inflation, January's personal consumption expenditures rose 0.3 percent. Even if there were no further increases in February or March, this quarter's spending would run at a 1.4 percent annual rate well above the flat-to-down figures forecasters had been expecting.

But analysts now anticipate at least some modest consumer spending increases for February and March. That added spending, coupled with the swing in inventories, could push this quarter's economic growth rate above 3 percent, analysts said.

One reason consumers have been able to increase their spending is that their incomes have resumed rising after a flat period last fall. With payroll employment down in January, wage and salary income did not rise. But during the past year, personal incomes were up 2.5 percent, more than double the 1.1 percent rise in consumer prices.

In addition, after-tax or "disposable" personal incomes rose 1.6 percent in January because of a further cut in federal income taxes that reduced the amount of tax being withheld from paychecks. Under terms of the tax cutting legislation passed last year, the tax rates on each income bracket were lowered another half-percentage point, except for the 15 percent bracket. Also, a new 10 percent bracket was created covering the first $6,000 in taxable income for single taxpayers and the first $12,000 for couples filing joint returns.

A second report from Commerce showed that construction spending rose 1.5 percent in January to a record annual rate of $876.7 billion. That contrasts with a period in the middle of last year when the pace of construction fell four months out of five. Most of the strength in construction came in spending for nonresidential projects, which had been particularly weak last year, and in public construction, some of which was undoubtedly related to activity spurred by last September's terrorist attacks.

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