Search the Internet          Tips  Sites: Finance, Investment

US economy sees first clear sign of recovery

A report on Tuesday suggesting the hard-hit US manufacturing sector is finally pulling out of its year-long slump provided the most solid evidence yet the stalled US economy is on a path to recovery.

The National Association of Purchasing Management's monthly index, the nation's main barometer of factory activity, registered its biggest jump in five years in August when it rose to 47.9 from 43.6 in July. That was well above economists' forecasts of a 43.9 reading.

Although the report showed overall manufacturing activity still contracted for the 13th straight month, new orders for manufactured goods rose for the first time in 13 months, production rose for the first time in eight months and new export orders were up for the first time in four months.

The NAPM data lit an early rally in US stocks that boosted the blue-chip Dow Jones industrial average more than 2 per cent and the Nasdaq index more than 1 per cent. But those gains disappeared by the close of trading, and the Dow ended less than half a per centage point higher and the Nasdaq was off 1.9 per cent.

Bond prices were hammered as Wall Street scaled back expectations of another Federal Reserve rate cut in October. The 30-year bond fell nearly two full points. The dollar racked up its biggest one-day gain against the euro this year.

"The recovery starts right here; further Fed easing is unnecessary," said Ian Shepherdson, chief US economist at High Frequency in Valhalla, New York.

Analysts said the NAPM report was clearly cause for optimism that the economy was turning around after a sharp slowdown over the past year. But they cautioned not to expect it to come roaring back quickly.

"I do think it's the best indication yet that the manufacturing sector as a whole is bottoming. It does show some sectors are showing some signs of life, but the recovery is going to be slow and fragile," said Jerry Jasinowski in an interview on cable news channel CNBC.

Separate economic reports Tuesday reflected lingering weakness in the economy. US auto sales slumped in August, while construction spending fell slightly in July.

The Federal Reserve Bank of Chicago said the risk that the United States is in a recession fell in July.

Clearest sign of recovery

Neal Soss, chief economist at Credit Suisse First Boston in New York, said manufacturing suffered the brunt of the US downturn and the latest NAPM survey was "the first unambiguous evidence" so far of a budding recovery.

It is now clear that deep Fed rate cuts, government tax rebates and tax cuts were having the desired effect of stimulating the economy, Soss said.

The Fed has cut its key borrowing rate by a total of 3.0 percentage points in seven moves so far this year and the government started sending $38 billion in tax rebates to American consumers this summer.

"The inventory excess is showing some signs of clearing out. But there is no boom on offer. We are just getting up off the canvas," Soss said.

The rise in NAPM's production component in August signaled that many industries had pared inventories sufficiently and were now beginning to fill new orders with new production rather than by drawing down existing stockpiles.

The NAPM new orders index, an important indicator of future production, rose to 53.1 in August from 46.3 in July -- indicating factories faced rising orders for the first time in 13 months. A reading on the NAPM under 50 signals activity is contracting while one above 50 indicates expansion.

Computer networking equipment giant Cisco Systems, which has been battered by a slowdown in business investment, said last month that its business was stabilizing and that it was pleased with order flow so far this quarter.

"We would look for any recovery to be led by new orders," Norbert Ore, chairman of NAPM's business survey committee, said in a teleconference after the data was released.

"I would consider this cause for optimism that the manufacturing sector has seen its worst," he said.

Manufacturing accounts for nearly one-sixth of all economic activity in the United States and the downturn over the past year was the worst since the 1990-91 recession.

Housing holds up

Separately, the government said construction spending fell slightly in July after recording its steepest drop in nearly a year in June.

Economists said the data showed continued resilience in housing but signs of vulnerability in commercial construction.

Spending on building slipped to a seasonally adjusted annual rate of $859.4 billion in July, down 0.1 per cent from its June pace of $860.0 billion, the Commerce Department said.

The July total followed a revised 1.0 per cent drop in June, the biggest decline since July of last year, when it fell 1.3 per cent. The department originally had said construction spending was off 0.7 per cent in June.

July's spending was 8.5 per cent higher than a year ago.

"Home building is holding up very well," said Mark Vitner, an economist with First Union Corp in Charlotte, N.C.

"We are seeing parts of nonresidential construction that are beginning to weaken a little bit, mainly office and hotel construction, which are two of the most overbuilt areas of the economy."

Housing has been a pillar of strength in an otherwise shaky economy, but the pace of activity has slowed recently.

US auto sales fell last month. Automakers reported slumping sales of new cars and trucks in an indication that consumers may be growing more pessimistic as the US economy weakens.

Ford Motor Co said its US sales, excluding its Jaguar, Volvo and Land Rover units, fell 8.4 per cent in August, continuing the year-long drop in results at the world's second-largest automaker.

Wall Street analysts had expected sales for Ford, which warned last month of lower profits for the remainder of the year and an impending restructuring, to drop anywhere from 12 to 20 per cent.

DaimlerChrysler AG's Chrysler group said its US sales fell 24 per cent in August, a steeper drop than analysts had expected. General Motors Corp. said its US sales fell 7 per cent in August, less than expected.

Tell us what you think of this report