Reports show modest but steady economic recovery

NEW YORK -- Mixed reports Monday on manufacturing, construction and personal income and spending made clear that the economy is enjoying modest growth even though the recovery remains fragile.

Manufacturing output expanded in February for a seventh straight month. Factory output has provided one of the few areas of strength for the economy. Still, the growth in manufacturing activity slowed compared with January and fell short of economists' expectations.

In addition, construction spending fell for a third straight month in January. And though personal spending rose slightly more than expected, Americans' incomes scarcely budged. In part, that was because Social Security recipients didn't get their usual cost-of-living boost.

The weak income growth could depress spending in the months ahead and drag on the economy's rebound.

The Institute for Supply Management, a trade group of purchasing executives, said its manufacturing index read 56.5 last month. That was slower than the 58.4 reading in January. A reading above 50 indicates expansion.

The ISM said its employment measure grew for the fourth time in five months, accelerating to 56.1 in February from 53.3 in January. February's number is the highest since January 2005. Gauges of production and new orders fell, indicating slower growth ahead.

Economists cautioned that manufacturers have been ramping up production for businesses that had let their stockpiles shrink to save money. If consumer spending remains tepid, manufacturing activity -- and its contribution to the economy -- will decline.

"The bulk of the upturn in manufacturing output is probably behind us," said Dan Greenhaus of Miller Tabak.

Still, many manufacturers say they're seeing hopeful trends. Chip giant Intel is predicting a rebound in demand for PCs this year. And automakers have been raising sales estimates and recalling some workers.

Even some companies in the hard-hit small-business sector are starting to report higher sales. Small companies have struggled with tight credit and have benefited less from government stimulus programs.

In early September, John Rosmarin, president of office supplies maker Saunders Manufacturing Co., said he hoped to restore full-time hours for employees within a couple of months. That's happening only now at the company's factory in Readfield, Maine.

"If you had called me maybe a month ago, I wouldn't have been this positive," Rosmarin said.

But a slight uptick in sales led him to reinstate Friday as a work day for his employees for the past three weeks. They had been working a 32-hour workweek for the past 12 months.

Rosmarin said big chains such as Wal-Mart Stores Inc. and small independent retailers are ordering more of Saunders' products.

Other areas of the economy are struggling. One of them is construction spending, which fell again in January, the Commerce Department said. A lag in commercial activity such as office buildings and hotels offset a housing rebound. The trouble builders are facing is likely to weigh on overall economic activity.

Overall construction spending dropped 0.6 percent. Housing construction rose 1.3 percent. But that gain could be temporary, given the weakness in sales of new and existing homes in January. Spending on nonresidential projects fell by 2.1 percent.

After the third monthly decline, construction spending in January stood at a seasonally adjusted annual rate of $884.12 billion, down 11.5 percent from a year ago.

The industry is expected to remain under pressure as home builders struggle to recover from the steepest slump in decades. Banks, with mounting loan problems in commercial real estate, have tightened lending standards.

Even with a 1.3 percent rise in private residential construction, activity in the sector still fell 6.4 percent from a year ago. Doubts about a sustained housing recovery grew after reports last week that sales of new homes plunged to a record low in January and sales of existing homes fell to their slowest pace since summer.

Commerce also reported that personal spending rose 0.5 percent in January. That was slightly better than expected. But incomes edged up only 0.1 percent -- the weakest showing in four months. The income figure raised concerns about whether consumers will be able to keep spending at a strong enough pace to support an economic rebound. Consumer spending is closely watched because it accounts for 70 percent of total economic activity.

The scant rise in incomes came even though private wages and salaries rose $16.1 billion at an annual rate, compared with a $2.3 billion gain in December. But households did not get their usual boost from the government's annual cost-of-living adjustment for Social Security and other benefits. The 50 million recipients of Social Security saw no gain at all in January because of low inflation.

It was the first time that's occurred in more than three decades. In January 2009, the boost from the Social Security cost-of-living increase translated into a $41.1 billion gain in incomes at an annual rate.

For the past two years, income growth has been held back by job losses caused by the worst recession since the 1930s. For all of 2009, personal incomes actually fell by 1.7 percent, the weakest showing since the Great Depression year of 1938, when incomes had fallen 7.7 percent.

The ISM manufacturing report said that even as employers' willingness to hire rose, current business activity slowed in February. Growth in new orders slowed to 59.5 from 65.9 in January, while production slowed to 58.4 from 66.2. New orders are a gauge of future activity.

Comments from the companies surveyed didn't mention harsh winter weather is a factor in the slowing pace of new orders and production, said Norbert Ore, chair of ISM's manufacturing survey committee.

A pickup in business investment in equipment and software, increases in exports and slower cutbacks of inventories have helped drive production gains.

Strong productivity gains mean there's been only slight hiring despite the ramp-up in production. The manufacturing sector added 11,000 jobs in January, the government said -- the first jobs gain since January 2007.

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Crutsinger reported from Washington.