economy

Business activity in U.S. improves more than forecast

Posted 2/29/12

WASHINGTON - Companies took in more orders and stepped up production in February, a sign demand will sustain the U.S. expansion after a fourth-quarter pickup.

The Institute for Supply Management-Chicago Inc. said Wednesday its business barometer climbed to a 10-month high of 64 from 60.2 in January. Readings above 50 signal expansion and the figure exceeded all forecasts in a Bloomberg News survey. The Commerce Department raised its growth estimate for the final three months of 2011, to 3 percent from 2.8 percent.

Income gains in the second half of 2011 were stronger than previously reported, which may bolster household purchases that make up 70 percent of the economy. Federal Reserve Chairman Ben S. Bernanke signaled Wednesday to Congress that recent signs of strength won’t change the central bank’s view that low rates are necessary through 2014.

“We’re continuing to see moderate economic expansion driven by an improvement in the labor market,” said Conrad DeQuadros, a senior economist at RDQ Economics LLC in New York. “Even with growth at 3 percent, the Fed remains concerned about the outlook with the unemployment rate high, and that’s the driver of their highly accommodative monetary policy.”

Stocks erased earlier gains as Bernanke damped speculation of more quantitative easing to stimulate the world’s largest economy. The Standard & Poor’s 500 Index dropped 0.22 percent to 1,369.21 at 12:09 p.m. in New York.

While describing “positive developments” in the labor market, Bernanke said during the first day of his semi-annual monetary policy report that “the job market remains far from normal.”

Bernanke on Labor Market

“At present, with the unemployment rate elevated and the inflation outlook subdued, the committee judges that sustaining a highly accommodative stance for monetary policy is consistent with promoting both objectives” of the Fed for stable prices and maximum employment, Bernanke said Wednesday in prepared testimony to the House Financial Services Committee.

At the same time, he gave no signal that more policy easing is under consideration. Recent data, including Wednesday's, shows the economy is picking up.

Economists projected the Chicago group’s gauge to rise to 61, and forecasts ranged from 58.3 to 63.

The employment measure rose in February to the highest level since May 1984, suggesting factories are boosting payrolls as production and orders increase. The ISM-Chicago’s production gauge increased to the highest since April, while new orders climbed to an 11-month high.

Capital Spending

“The manufacturing sector is doing very well right now,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Motor vehicle output is pretty solid and we’ve seen some strength in capital spending.”

The gain in gross domestic product in the final three months of 2011 was the biggest since the second quarter of 2010. Economists surveyed by Bloomberg called for no change from the previously reported increase.

Consumer spending grew at a 2.1 percent annual rate, little changed from the 2 percent initial estimate and reflecting a pickup in demand for services. Purchases added 1.5 percentage points to growth, the most in a year.

Job growth is bolstering spending as incomes strengthen. After-tax incomes adjusted for inflation increased at a 1.4 percent annual rate in the final three months of 2011, more than the previously reported 0.8 percent gain.

Wages, Salaries

In the third quarter, incomes climbed 0.7 percent compared with a 1.9 percent slump that was initially reported. Wages and salaries from July through September rose $107.2 billion, up from the $24.8 billion gain initially reported.

This helped boost the savings rate to 4.5 percent from a previously reported 3.7 percent. In the third quarter, the rate was 4.6 percent.

“The consumer may well be buying back into the economy, and if that happens, this economy will take off,” Andrew Liveris, president and chief executive officer of Midland, Michigan-based Dow Chemical Co., said in an interview yesterday. “As you get better economic data, confidence builds.”

Inventories contributed the largest boost to growth in the final three months of 2011. Stockpiles added 1.88 percentage points to GDP. Final sales, or GDP minus inventories, rose 1.1 percent.

Imports of goods and services were less than initially reported, subtracting less from fourth-quarter GDP.

Corporate Spending

Business investment was revised higher. Corporate spending on structures fell at a 2.6 percent rate, compared with a 7.2 percent drop initially reported. Business spending on equipment and software rose at 4.8 percent annual rate last quarter. Recent data indicate it may be strengthening.

Factory output rose 0.7 percent in January after a 1.5 percent surge in December, marking the best two-month performance since July-August 2009, Fed data showed earlier this month. The Institute for Supply Management’s index of new orders to manufacturers rose last month to the highest level since April.

Employers added 243,000 workers in January, the most in nine months, and the unemployment rate dropped to 8.3 percent, Labor Department data show.

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