Data Boosts Hopes for Economic Recovery

U.S. manufacturing activity declined in November but at a slower pace than in the prior month while consumer spending registered the biggest one-month rise ever in October, according to reports on Monday that raised hopes for a quick economic recovery.

The National Association of Purchasing Management's main index rose to 44.5 in November from 39.8 in October, which was the lowest level in almost 11 years. The number topped economists' expectations for a 47.1 reading. But it was the 16th consecutive month it was below 50, which indicates activity is contracting.

In a separate report, the government said consumer spending soared by a record 2.9 percent in October after a 1.7 percent fall in October. Wall Street had expected a 2.4 percent rise. The strength in spending was due mainly to auto sales boosted by widespread discounting and zero-percent financing from carmakers.

A third report showed construction spending rose 1.9 percent in October after five monthly declines. It was the largest rise since January. Economists had expected a 0.3 percent drop.

"Both NAPM and construction expenditures suggest the economy may be a bit stronger than the consensus was expecting," said Drew Matus, financial economist at Lehman Brothers in New York.

But Matus said he still expected the Federal Reserve to keep cutting rates until sure signs of economic growth emerged.

Though all the data were stronger than expected, they had little impact on markets, which continued to expect another small Fed rate cut next week.

Sliver of Hope

Manufacturing, which accounts for about a sixth of the economy, has been one of the hardest-hit sectors during a slowdown that began last year and deepened this year, especially after the Sept. 11 attacks on the World Trade Center and the Pentagon.

The nation's official arbiter of recession, the National Bureau of Economic Research, said last week a recession began in March 2001.

Norbert Ore, chair of the NAPM Business Survey Committee, said the manufacturing sector could return to growth during the April-June quarter of 2002. But he cautioned that it was too soon to say a recovery was imminent.

When the main NAPM index remains above 42.7 for a time, Ore said, that generally indicates an expansion of the overall economy. The November reading indicates the overall economy is growing while manufacturing continues to contract, he said.

The main NAPM index last rose in August, boosting hopes for a long-awaited recovery in manufacturing. But the Sept. 11 attacks quashed hopes for a quick turnaround.

Low interest rates, plunging energy prices and pared-down inventories all bode well for a manufacturing recovery next year, Wall Street analysts said.

"The manufacturing sector is showing signs of hope," Merrill Lynch economist Karen Dexter said.

A 10.5-point increase in the New Orders Index, a barometer of future strength in manufacturing, was the sharpest one-month rise in 18 years, NAPM said. The index jumped to 48.8 from 38.3 in October, fueling hopes for a recovery.

"This report represents clear and tangible evidence that the events of September 11th did not spark a whole new sustained downturn," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The Production Index rose to 47.1 from 40.9, another indication of building strength.

The economic slowdown and falling energy prices pushed the Prices Index down to a 52-year low of 31.6, compared with 32.5 in October. November was the ninth consecutive month that manufacturers saw their input prices falling.

The Employment Index rose slightly, to 35.7 from 35.1. But economists expect another substantial drop in non-farm payrolls for November when the government issues its monthly employment report on Friday. The consensus forecast is for a decline of 189,000 following a massive drop of 415,000 in October.

Spending Surge Impresses

Analysts said the surge in consumer spending in October, despite incomes that were flat for a second month, was impressive.

"You're looking at an extremely strong start to the fourth quarter in terms of consumer spending," said John Ryding, senior economist at Bear Stearns.

A number of economists said the spending numbers raised the possibility that fourth-quarter gross domestic product, which had been widely expected to contract, could now show growth. But many still expected GDP to fall this quarter because of significant weakness in business investment. In the third quarter, GDP shrank by 1.1 percent.

"This (NAPM) report together with the strong personal spending and construction data ought to make the Fed pause before easing again," said High Frequency's Shepherdson. "But with payrolls dropping fast, an ease next week still looks very likely."

The Fed has already cut rates 10 times this year by a total of 4.5 percentage points, bringing the benchmark overnight lending rate, or federal funds rate, down to 2.0 percent. The next meeting of central bank policy-makers is on Dec. 11.