Latest factory, building data: Two more green shoots for economy

Two additional green shoots for the U.S. economy: the latest manufacturing and construction data each came in at better-than-expected levels.

First, the Institute for Supply Management announced Monday that it's manufacturing index increase to 42.8 percent in May from 40.1 percent in April. That was above the 42.0 percent Bloomberg News consensus estimate. The index was at 36.3 percent in March and 35.8 percent in February. Readings above 50 indicate an expansion; below 50, a contraction.

What's more, the ISM's new orders index, which is closely-monitored by economists because it is a good indicator of future activity, rose above 50 percent to 51.1 percent.

Construction spending: Upside surprise

Meanwhile, construction spending registered a positive surprise. U.S. construction spending rose 0.8 percent in April, following a revised 0.4 percent increase in March, the U.S. Commerce Department announced Monday (pdf).

The April construction gains were led by residential construction, which increased 0.6 percent. Economists surveyed by Bloomberg News had expected construction spending to fall 0.8 percent in April.

The U.S. construction sector has experienced its worst year in almost a decade, but Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubish IFJ Ltd., is in the bullish camp.

"Construction activity has seen its worst days and is on the mend," Rupkey told Bloomberg News Monday.

Kermit Baker, AIA chief economist, agreed. "A growing number of architecture firms report potential projects arising from federal stimulus funds," Baker told Bloomberg News Monday.

Concerning ISM Manufacturing data, five of the 18 manufacturing industries reported growth in May: nonmetallic mineral products; plastics & rubber products; machinery; food, beverage & tobacco products; and printing & related support activities. The industries reporting contraction in May: textile mills; furniture & related products; electrical equipment, appliances & components; fabricated metal products; primary metals; transportation equipment; computer & electronic products; wood products; apparel, leather & allied products; miscellaneous manufacturing; chemical products; petroleum & coal products; and paper products.

Economic Analysis: A good way for the U.S. economy to start the week. The ISM manufacturing data continued its upward track. However, investors should keep in mind that below 50, the index is still in contraction territory. Here is the pertinent takeaway: the manufacturing sector is still contracting, but at least it's now shrinking at the slowest pace in about a year.

Meanwhile, April construction spending notched an upside surprise, up 0.8 percent, following March's 0.4 percent gain. The April construction gain was not that broad based and was led by the often volatile home improvement segment. Gains in that category are both plausible and understandable: with a large inventory of unsold new and existing homes, and with potential home buyers still cautious, home maintenance came to the foreground, aided by homeowners choosing to improve their current home, absent the purchase of another home.

Bottom Line: The ISM and construction data each qualify as green shoots: they show a U.S economy inching toward recovery, but a long journey remains up ahead.
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