Construction, Price Reports Signal Rebound

TIMES STAFF WRITER

In what experts say is the strongest evidence yet that the economy may be coming out of its long slump, the government reported Tuesday that construction of new homes and apartments soared in February while industrial production rebounded after a three-month slide.

"Sales of homes are up nicely," said Larry Kimball, an economist for WEFA Group in Bala-Cynwyd, Pa. "With production up, you are going to need more jobs. The whole pattern now looks like we're in a recovery phase."

There was also continuing good news on inflation and trade. The Labor Department reported that consumer prices rose a moderate 0.3% in February. The Commerce Department reported that the nation's trade deficit narrowed in 1991 to $8.62 billion, the smallest in nine years.

Housing starts last month surged an unexpectedly strong 9.6% to 1.3 million units, the highest level since March, 1990. The Commerce Department said it was the biggest increase in a year and followed a 6.4% gain in January.

All regions of the country reported a jump in housing construction, but the biggest gains were reported in the West (up 10%) and Midwest (up 14.3%).

Several analysts said mild weather in the Midwest and low interest rates--which hit an 18-year low in January--played major roles in the construction surge. But with interest rates inching up in recent weeks, they cautioned that the increases might not be sustained.

Other economists noted that the figures on housing starts are compared to an especially weak period a year ago, when hostilities in the Persian Gulf slowed the nation's economy to a virtual standstill.

Still, most experts were heartened by the nation's economic performance in February.

"There's definitely more optimism in the local business community and among consumers," said Jack Kyser, chief economist for the Economic Development Corp. of Los Angeles County. "I'm a bit nervous because we are comparing against a weak quarter in 1991. But the economy seems to be rolling forward again."

"The long recession is over," said Lawrence A. Hunter, economist for the U.S. Chamber of Commerce. The reports "signal a clear turning point for the economy," which started its decline in July, 1990.

Since the nation's euphoria over the end of the Persian Gulf War produced a short-lived burst of consumer buying last spring, the nation's economy has been struggling to get back on track.

For nearly a year, business and consumers seemed unmoved by the Federal Reserve Board's efforts to boost the economy by slowly cutting interest rates. But the Fed's 1-percentage-point drop in a key interest rate in December has begun to produce glimmerings of a recovery, economists say.

"The (February) numbers are obviously a sign that low interest rates are starting to work," said Daryl Delano, a senior economist at Cahners Economics in Newton, Mass. "The Fed always said it would take some time. I think that's what you are beginning to see now. And when housing comes back, then you get some positive effects throughout the economy."

Housing is considered a barometer of recovery since it has such a broad impact, accounting for as much as 20% of the nation's economic activity. Increased construction boosts employment and stimulates sales for home-related items, from furniture to garden equipment.

Other positive news was found in the nation's factories. The Fed said the output at the nation's plants, mines and utilities rose 0.6% in February, marking the first increase in five months. Economists said the report provided evidence that factories were increasing output in response to rising retail sales.

It was the strongest increase since July and followed a 0.8% decline in January, drops in December and November and no change in October.

Auto and truck production jumped 11.9% in February. Production of other durable goods for consumers--big-ticket items expected to last three or more years--was up 1.3%. Non-durable goods output rose 0.3%.

In an accompanying report, the Fed said the operating rate at factories, mines and utilities jumped to 78.2% of capacity, up from 77.9% in January.

The news on inflation continued to be good. The Labor Department said the 0.3% increase in consumer prices in February was driven by higher food and apparel costs. Energy prices continued to fall.

The rise in consumer prices followed a 0.1% gain in January. For the first two months of the year, inflation was advancing at a 2.2% annual rate, well below the 3.1% gain for all of 1991, the department said.

Prices paid for goods and services purchased by consumers in the five-county area of Southern California rose just 0.4%. Fully 70% of the increase was caused by higher housing and apparel costs, said Sam Hirabayashi, regional commissioner of the Bureau of Labor.

The combination of moderate inflation and resurgent economic growth produced a 1.2% increase in Americans' real earnings, more than erasing the previous month's decline.

On the trade front, the government said the current account deficit shrank dramatically from $92.12 billion in 1990. Recession-dampened imports, strong export growth and allied contributions to pay for the Persian Gulf War all were factors in the decline.

It is the broadest measure of the nation's trade and includes investment flows as well as trade in goods and services. The deficit is expected to climb this year as improved economic growth whets Americans' appetite for imports.

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