Latest factory, construction data points to recovery

The Institute for Supply Management's manufacturing index revealed an improving manufacturing sector in July, while the U.S. Commerce Department announced that construction spending rose on signs of housing sector stabilization in June.

The ISM manufacturing index rose to 48.9 percent in July from 44.8 in June -- the index's seventh consecutive monthly increase. Economists surveyed by Bloomberg News had expected the index to total 46.5 in July. The index totaled 42.8 in May. It hit a low of 32.9 in December 2008.

Readings above 50 indicate an expansion; under 50, a contraction. The ISM index has been below 50 for about 2 years.

Also, the new orders index, a measure of future demand, increased to 55.3 in July from 49.2 in June; the production index rose to 57.9 percent from 52.5 percent in June; the employment index increased to 45.6 percent from 40.7 percent in June.

Meanwhile, construction spending rose 0.3 percent in June to $965.7 billion, the Commerce Department announced, as spending on housing and public works projects increased. However, construction spending is still down 10.2 percent compared to a year ago -- a reading that underscores both the depth and length of the U.S. recession.

Economists surveyed by Bloomberg News had expected June construction spending to decline 0.5 percent. Construction spending decreased a revised 0.8 percent in May and rose 0.6 percent in April.

Fiscal stimulus boosts construction

In June, public construction spending increased 1 percent, with federal spending increasing 1.9 percent and state and local spending increasing 1 percent. What's more, government agencies accounted for 33 percent of June construction spending, up from 29 percent a year ago -- one indication of the impact of the federal government's $787 billion fiscal stimulus package.

Also in June, private sector spending fell 0.1 percent, but private residential construction spending increased 0.5 percent; private non-residential construction spending declined 0.5 percent.

Economic Analysis: Two encouraging data points for the U.S. economy -- and a pair that the U.S. stock market will probably like. The ISM manufacturing data, aided by gains in orders, production, and exports, provided further evidence that the factory sector is stabilizing. Further, assuming that leaner inventories lead to a larger snap-back -- as leaner inventories have done in previous recoveries -- when demand resumes, the manufacturing sector should register noticeable improvement in the quarters ahead. (This, however, assumes that we will experience a resumption of "typical, recovery-stage" demand.)

Also, construction spending in June was encouraging: the stimulus package is beginning to take effect, boosting an otherwise tepid construction sector. Further, the June residential construction data provided further evidence that that segment is bottoming.

Taken together, the ISM and construction data support the thesis that the U.S. recession is bottoming. However, investors should not become overjoyed: tepid demand conditions still exist, and until demand increases substantially, a robust U.S. economic recovery will not occur.

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