Economy Shows Signs of Regaining Strength
Government statisticians on Wednesday gave the nation something to savor along with Thanksgiving dinner, reporting new signs of economic strength at the shopping mall, on the factory floor and in the unemployment office.
Consumer spending rose 0.4% in October, the biggest gain in three months. Orders for communication gear and other durable goods surged 2.8% after two consecutive declines. Initial claims for jobless benefits fell to the lowest level since February 2001. Other indicators provided reinforcement, fueling a powerful, pre-holiday rally on Wall Street.
Economists said that the new statistics suggest the recovery is proceeding, albeit at a creeping pace, and that the risk of a second round of recession is considerably lower than many had feared.
“The numbers are fantastic,” said economist Brian Wesbury at Griffin, Kubik, Stephens & Thompson Inc., a Chicago investment banking firm. “It appears the odds of a double dip are virtually zero.”
Although there were a few sour notes, such as a 38-year low in help-wanted advertising, the performance of key indicators helped propel the stock market to big gains. Meanwhile, yields on longer-term Treasury bonds surged as investors bet that a stronger economy could mean greater demand for money in 2003, driving rates higher.
“That’s the financial markets’ way of saying that maybe the economists finally do have it right and the recovery really is on track,” said Richard Yamarone, chief economist at Argus Research Co. in New York.
Consumer spending has provided the economy with critical support during the downturn that began in March 2001, and the latest figures show it has continued to hold up in the face of rising unemployment. October’s 0.4% increase was the biggest since July, the Commerce Department said, and erased a September decline of 0.4%, which turned out to be smaller than reported a month ago.
Personal income grew 0.2% in October, the smallest gain in three months, but it followed nearly a year of improvement in the category (excepting a slight income dip last July).
“You cannot fight the strength of this consumer,” Yamarone said. “The consumer has three things going for him right now: low interest rates, low inflation and rising incomes.”
There were indications Americans would continue to dig deep during the upcoming holiday shopping season. The University of Michigan’s consumer confidence index rose 4.4% in November, its first increase in six months. Although economists had been hoping for a slightly stronger rebound, a big increase in expectations of future conditions contributed to Wednesday’s ebullience.
“After going through a period where we had a run of relatively bad news, it’s nice to be on the other side,” said economist Chris Varvares at Macroeconomic Advisers, a St. Louis consulting firm. “We’re in a game of catch-up.”
Some analysts were more impressed by the increase in orders received by U.S. factories for cars, appliances, machinery and other durable goods. October’s 2.8% gain was more than double the consensus forecast of 1.3%, and ended a losing streak that began in August, the Commerce Department said.
Orders for communications equipment posted the biggest percentage increase, soaring 65.2%. Vehicle orders rose 3.9%, and machinery rose 3.3%. Computer orders fell 1.3%, commercial aircraft slipped 3.3%, and defense aircraft fell 5.9%.
“We got a positive feast of economic data today, but the icing on the cake was the durable goods numbers,” Merrill Lynch economist Gerald Cohen said. “It definitely suggests that companies are starting to invest again.”
More evidence of a manufacturing rebound was provided by a survey of Midwest purchasing managers. The managers’ association said a monthly index of business activity climbed to 54.3 in November from 45.9 in October. A reading above 50 is considered a sign of expansion.
In Hammond, Ind., the manufacturing recovery has not shown up in the order books of Berlin Metals, a major supplier of sheet steel used by makers of finished products. “I’ve seen neither a downturn nor an improvement,” President Roy Berlin said. “Things have been relatively stable.”
On the other hand, Berlin cited signs of change in his own behavior. “I refinanced my house,” he said. “I had a little extra cash, so I spent a little of it. I bought some furniture. I bought a new DVD player. So I’m probably one of those guys who helped the economy a little bit.”
There were even signs of hope on the employment front, where economic recoveries are generally slow to produce tangible results. First-time claims for unemployment benefits declined to 364,000 last week, the lowest level since February 2001, the Labor Department said.
Mark Vitner, senior economist with Wachovia Corp. in Charlotte, N.C., said the new statistics indicate the economy’s weakness during the fall was attributable primarily to temporary factors. They include the 10-day West Coast port lockout that ended Oct. 9, a spate of severe weather, the Washington area sniper attacks and a Securities and Exchange Commission crackdown on corporate accounting, he said.
“All of those things worked together to slow new factory orders and reduce hiring, and now they’ve been largely cleared up,” Vitner said. “We’ve moved past that temporary lull in the economy.”
Even so, some analysts interpreted the latest soundings with caution, noting that not all of the numbers were positive. A cautious Federal Reserve report on Wednesday said the economy “grew slowly, on balance, in late October and early November.”
Also, the Conference Board’s help-wanted advertising index fell to 40 in October, the lowest level since February 1964.
“There are still some dark tints to the data,” said Mark Zandi, chief economist at Economy.com, a Philadelphia-area consulting firm. “Firing may have abated a bit, but hiring hasn’t yet picked up. We need to see some hiring soon, otherwise consumers may pull back and the recovery may falter.”
