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Good news boosts recovery hopes

Manufacturing, construction, contracts post strong readings

WASHINGTON – Hopes for the fledgling economic recovery got a boost Monday from better-than-expected news on manufacturing, construction and contracts to buy homes.

The surprisingly strong readings provided some comfort that the economy is packing more momentum than assumed going into the end of the year. Still, with jobs scarce, lending tight and consumers wary of spending, it’s unclear whether the gains can be sustained as government stimulus programs wind down.

The Institute for Supply Management’s gauge of manufacturing activity grew in October at the fastest pace in more than three years. It was driven by businesses’ replenishing of stockpiles, higher demand for American exports and support from the government’s $787 billion stimulus program.

The ISM index shot up to 55.7 in October, the third straight reading above 50, which signals growth in the sector. It was the highest level since April 2006.

“It clearly looks like we are seeing a turnaround in the manufacturing sector,” said David Wyss, chief economist at Standard & Poor’s in New York.

Economists cautioned that the manufacturing pattern seen in the past two post-recession recoveries likely will be repeated this time: In each case, early strength in manufacturing, led by companies’ restocking of inventories, faded within a few months.

Wyss agrees that the ISM index could dip below 50 in the first quarter of next year. But he thinks that would be a temporary slump and not a sign that the economy was dipping back into recession.

“A bit of a slip in manufacturing would be consistent with a sluggish recovery,” he said.

The overall economy, as measured by the gross domestic product, expanded at a 3.5 percent rate in the July-September quarter. That number provided compelling evidence that the longest recession since the 1930s was ending. Wyss said he expects GDP growth to slow to around 1.7 percent in the current quarter and to remain sluggish in the first half of next year.

Other economists are more optimistic, with some forecasting that GDP growth could come in around 3 percent in the current quarter. They pointed to the government report Monday that construction spending rose a bigger-than-expected 0.8 percent in September, fueled by the strongest jump in home construction in six years. The gain in housing offset continued weakness in construction of office buildings, hotels and shopping centers.

In a third report, the National Association of Realtors said the volume of signed contracts to buy previously occupied homes rose 6.1 percent in September to a reading of 110.1. That’s the highest level since December 2006. And it’s more than 21 percent above a year ago.

The eighth straight monthly gain came as the housing market rebounds from the worst downturn in decades. The improvement has been aided by federal intervention to lower mortgage rates and bring more buyers into the market. For example, the contracts to buy homes rose as buyers scrambled to qualify for a tax credit for first-time buyers that expires at the end of this month. Congress is moving to extend the credit until April 30.

“We think this recovery is sustainable,” said Sal Guatieri, an economist at BMO Capital Markets. “We think there is enough government stimulus in place to push the economy forward and manufacturing will be getting support from a weakening U.S. dollar and strength in Asia which will boost exports.”