Hopeful signs for economy emerge
AP Economics Writer
WASHINGTON ” Fresh signs emerged Monday that the recession is letting up.
Manufacturing’s slide is slowing. Builders are boosting spending on construction projects ” including homes. And consumers aren’t cutting back as much as some had feared.
A trio of reports gave Wall Street a big lift on the same day that industrial icon General Motors Corp. filed for bankruptcy protection. The federal government is taking a majority ownership stake in the company, which announced new plant closings.
Investors and economists focused instead on the encouraging news about the economy.
The Dow Jones industrial average rose more than 230 points, or 2.7 percent, in late-afternoon trading. Other major indexes also advanced more than 2 percent.
“What looked like a flicker of light at the end of the tunnel is now starting to look like a beacon,” said Richard Yamarone, economist at Argus Research. “We are no longer in the deep throes of recession. A recovery may be just a few months away.”
Economists were especially heartened by a report from the Institute for Supply Management that showed U.S. manufacturing activity shrinking at a slower pace in May. Reports from Asia and Europe indicated similar improvements in their manufacturing sectors.
The institute’s index came in at 42.8 ” its highest since September and up from 40.1 in April. A reading below 50 still indicates activity contracted, but the figure surpassed economists’ forecasts.
Importantly, an index of new orders placed with U.S. factories rose to 51.1 in May. It was the first time this barometer had grown since November 2007, the month before the recession began.
And businesses’ inventories shrank, suggesting supplies will soon need to be replenished. That would boost factory production, aiding overall economic activity.
“The data add to mounting evidence of an abatement in the deep factory-sector recession,” said Cliff Waldman, economist at Manufacturers Alliance/MAPI, a manufacturing research group.
“The worst has clearly passed for U.S. factories,” he said. “Nonetheless, a real recovery might be months away. The global economic picture remains difficult, and financial conditions are still problematic. But better days are clearly ahead.”
Another report, from the Commerce Department, said construction spending rose a surprising 0.8 percent in April. Economists had been expecting a 1.2 percent decline.
It marked the second straight month that construction spending has risen. Before that, spending had fallen for five straight months. Private builders in April increased spending on housing projects ” something that hadn’t happened since August.
A third report showed consumers trimmed spending by 0.1 percent in April, slightly less than the 0.2 percent reduction economists were forecasting. Still, it marked the second straight month that consumers cut back, a reminder that many shoppers remain wary.
With unemployment rising, consumers are expected to stay fairly cautious in the months ahead. Because consumer spending accounts for roughly 70 percent of overall economic activity, it’s closely watched by economists.
Americans’ incomes ” the fuel for future spending ” jumped 0.5 percent in April, after two straight months of declines. The improvement was due to tax cuts and benefit payments flowing from President Barack Obama’s stimulus package, the government noted. Wages and salaries were flat in April.
All three reports, though, reinforced analysts’ beliefs that the economy isn’t sinking nearly as much now as it was in the prior six months.
Forecasters at the National Association for Business Economics, or NABE, predict the economy will contract at a 1.8 percent pace in the April-June quarter.
Other analysts think the economic decline could be steeper ” around a 3 percent pace. Some think it could be less ” about a 1 percent pace.
The expected improvement would come from less drastic spending cutbacks by businesses. And companies could start to rebuild razor-thin inventories.
In the first quarter, the economy contracted at a 5.7 percent pace. That followed a staggering 6.3 percent annualized drop in the fourth quarter of 2008 ” the biggest in a quarter-century.
Federal Reserve Chairman Ben Bernanke has said he’s hopeful the recession will end later this year. And NABE forecasters say the economy could start growing again as early as the third quarter. Obama’s stimulus package of increased government spending and tax cuts should fuel economic activity.
But Bernanke and other economists warn that the recovery will be slow, and unemployment will keep rising well after the recession has ended. Some predict it could hit 10.7 percent by the second quarter of next year.
The nation’s unemployment rate jumped to 8.9 percent in April, the highest in 25 years. Economists estimate the rate climbed to 9.2 percent in May. The government releases the unemployment report on Friday.
Since the start of the recession in December 2007, the economy has lost 5.7 million jobs.
Against this backdrop, consumers are motivated to save more.
Americans’ personal savings rate zoomed to 5.7 percent in April, the highest since February 1995. The level of savings ” $620.2 billion ” was the most on records dating to January 1959. All that reflects a more thrifty consumer whose wealth ” notably nest eggs, investment holdings and home values ” has been hard hit by the recession.
AP Business Writer Tali Arbel in New York contributed to this report.