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Manufacturing, real estate activity grew in August

September 02, 2009|Neil Irwin | Irwin writes for the Washington Post.

Two sectors of the economy that have suffered the longest, deepest decline in the recession -- manufacturing and housing -- are now expanding, according to new data that offer fresh evidence that the economy has begun to grow.

The Institute for Supply Management reported Tuesday that manufacturing expanded in August for the first time since January 2008. The institute's index of business activity rose to 52.9, from 48.9. Any number below 50 signals contraction.

President Obama cited the data as evidence that the economy is improving. "It means these companies are starting to invest more and produce more," he said in the Rose Garden. "It is a sign that we're on the path to economic recovery."

Separate reports showed that spending on residential construction jumped in July as pending home sales increased for a sixth month in a row, supporting other indications that the decline in the housing market is leveling off.

Taken together, the reports show that two of the hardest-hit sectors have, at the very least, ceased to be a drag on growth. The new indicators, in fact, suggest that manufacturing and housing could drive the incipient recovery, accounting for an unusually large share of growth and stimulating a rebound in more sluggish areas such as consumer spending.

"The key we're looking for is consistency," said Bernard Baumohl, chief global economist at Economic Outlook Group. "The more we see of these types of indicators all sending the same message, the more confident we are that the worst is over and the economy is on track to recover."

Stronger demand for automobiles, spurred by the federal government's "cash for clunkers" program, has helped fuel the expansion. Manufacturers are also revving up production to compensate for inventory levels that were allowed to dwindle in recent months, and exports of manufactured goods have risen as the global economy has stabilized. Eleven of 18 industries included in the manufacturing survey expanded in August.

And manufacturing conditions look set to improve further. The institute's index of new orders rose to 64.9, and an index of current production rose to a five-year high.

The report is "a strong signal that industrial output will contribute significantly to overall economic growth in the second half of the year," said economist Michael Feroli at JPMorgan Chase & Co.

The Commerce Department reported that construction spending fell 0.2% in July. Commercial construction spending slid 1.2%, and home construction spending rose 4.5% after a long decline.

Also pointing to a continued improvement in housing in coming months was a report by the National Assn. of Realtors showing that pending home sales rose 3.2% in July, the sixth monthly increase.

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Post staff writer Michael Fletcher contributed to this report.

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