Factory Activity Picks Up, More Gains Eyed as Winter Fades

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By Lucia Mutikani

WASHINGTON -- U.S. factory activity rose in March, with production posting its biggest increase since the recession ended in the latest indication the economy was regaining its footing after a brutal winter.

An unusually cold and snowy winter chilled activity early in the year and signs of a thaw should boost hopes of a strong bounce back in economic growth in the second quarter.

"Winter is over. The economy is looking more positive today and overall business conditions continue to show improvement," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

The Institute for Supply Management said Tuesday its index of national factory activity rose to 53.7 last month from a reading of 53.2 in February.

Though it was below economists' forecast for a 54 reading, March marked the second month of gains. Readings above 50 indicate expansion in the sector, which accounts for about 12 percent of the economy.

Activity was buoyed by a 7.7 percentage point rebound in the production index after it showed contraction in February. The increase was the largest since June 2009, just as the recession was ending.

The forward-looking new orders index rose to 55.1 from 54.5 in February.

There was also a surge in order backlogs and export orders. %VIRTUAL-article-sponsoredlinks%Fourteen of the 18 manufacturing industries reported growth.

"The broad-based nature of the gains among industries underscores the extent of the rebound as the sector continues to dig itself out of the weather-induced slump earlier this year," said Millan Mulraine, deputy chief economist at TD Securities in New York. "It offers an upbeat assessment on manufacturing."

Stocks on Wall Street pushed higher on the factory report, with the Standard & Poor's 500 index hitting a record high. Prices for U.S. Treasury debt fell and the dollar was marginally weaker against a basket of currencies.

Even as the sector begins to break out of the cold spell, factory activity remains weaker than during the second half of last year. Warehouses are bulging with massive stocks of unsold goods accumulated in the second half of 2013, leaving businesses with little incentive to place large orders with manufacturers.

Customer Inventories Down

The ISM survey found a sharp drop in customers' inventories, though manufacturers' inventories were unchanged from February.

A desire to reduce inventory and the harsh weather are expected to hold the economy to an annualized growth pace below 2 percent in the first quarter. That would be a step back from the fourth-quarter's 2.6 percent rate.

A separate factory gauge from data firm Markit slipped in March, but stayed in positive territory, as ebbing overseas demand clipped orders.

While manufacturing appears to shaking off winter's chill, construction activity continued to be held back in February.

The Commerce Department said construction spending edged up 0.1 percent after slipping 0.2 percent in January.

Construction spending was curbed by a 0.8 percent drop in private residential construction projects, which was the largest fall since July.

But a surge in spending on nonresidential construction, such as factories and power plants, lifted overall private outlays to their highest level since December 2008.

"Given housing's recent disappointing numbers, this sector's cyclical turnaround comes at a good time," said Stephanie Karol, an economist at IHS Global Insight in Lexington, Mass.

"Real construction spending should contract in the first quarter. This is an inauspicious beginning to 2014, but we expect conditions to improve later in the year."

The decline in private residential construction was led by a 1.1 percent drop in single-family home building.

Public construction spending nudged up 0.1 percent in February, with a jump in federal outlays offsetting a fall in state and local government spending.

-Additional reporting by Ryan Vlastelica in New York.

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9 Numbers That'll Tell You How the Economy's Really Doing
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Factory Activity Picks Up, More Gains Eyed as Winter Fades
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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