Reports suggest the economy isn’t out of the woods

Three economic reports on Monday showed an economy that is stronger than at the depths of the recession but one that still faces dangers.

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• A manufacturing sector index showed expansion in February for a seventh straight month. Factory output has provided one of the few areas of strength for the economy. Still, the growth in manufacturing activity slowed compared with January and fell short of economists’ expectations.

• Construction spending fell for a third straight month in January.

• Personal spending rose slightly more than expected, but Americans’ incomes scarcely budged. In part, that was because Social Security recipients didn’t get their usual cost-of-living boost. The weak income growth could depress spending in the months ahead and drag on the economy’s rebound.

The Institute for Supply Management, a trade group of purchasing executives, said its manufacturing index read 56.5 last month. That was slower than the 58.4 reading in January. A reading above 50 indicates expansion.

The ISM said its employment measure grew for the fourth time in five months, accelerating to 56.1 in February from 53.3 in January. February’s number is the highest since January 2005. Gauges of production and new orders fell, indicating slower growth ahead.

Economists cautioned that manufacturers have been ramping up production for businesses that had let their stockpiles shrink to save money. If consumer spending remains tepid, manufacturing activity — and its contribution to the economy — will decline.

“The bulk of the upturn in manufacturing output is probably behind us,” said Dan Greenhaus of Miller Tabak.

Other areas of the economy are struggling. One of them is construction spending, which fell again in January, the Commerce Department said. A lag in commercial activity such as office buildings and hotels offset a housing rebound. The trouble builders are facing is likely to weigh on overall economic activity.

Overall construction spending dropped 0.6%. Housing construction rose 1.3%. But that gain could be temporary, given the weakness in sales of new and existing homes in January. Spending on non-residential projects fell 2.1%.

After the third monthly decline, construction spending in January stood at a seasonally adjusted annual rate of $884.12 billion, down 11.5% from a year ago.

The industry is expected to remain under pressure as home builders struggle to recover from the steepest slump in decades. Banks, with mounting loan problems in commercial real estate, have tightened lending standards.

Even with a 1.3% rise in private residential construction, activity in the sector still fell 6.4% from a year ago. Doubts about a sustained housing recovery grew after reports last week that sales of new homes plunged to a record low in January and sales of existing homes fell to their slowest pace since summer.

Commerce also reported that personal spending rose 0.5% in January. That was slightly better than expected. But incomes edged up only 0.1% — the weakest showing in four months. The income figure raised concerns about whether consumers will be able to keep spending at a strong enough pace to support an economic rebound. Consumer spending is closely watched because it accounts for 70% of total economic activity.

The scant rise rise in incomes came even though private wages and salaries rose $16.1 billion at an annual rate, compared with a $2.3 billion gain in December. But households did not get their usual boost from the government’s annual cost-of-living adjustment for Social Security and other benefits. The 50 million recipients of Social Security saw no gain at all in January because of low inflation.

It was the first time that’s occurred in more than three decades. In January 2009, the boost from the Social Security cost-of-living increase translated into a $41.1 billion gain in incomes at an annual rate.

For the past two years, income growth has been held back by job losses caused by the worst recession since the 1930s. For all of 2009, personal incomes actually fell 1.7%, the weakest showing since the Great Depression year of 1938, when incomes had fallen 7.7%.

In January, after-tax incomes actually dropped 0.4%, biggest monthly decline since July.

With after-tax incomes falling as spending increased, the personal savings rate dipped to 3.3% in January, from 4.2% in December. For all 2009, the savings rate had risen to 4.3%, highest annual savings rate since 1998.

The dip in the savings rate in January was seen as temporary. Economists believe the savings rate will continue rising as households struggle to cope with the continued threat of layoffs by rebuilding their balance sheets.

Inflation continued to be a no-show. A price gauge tied to personal consumption edged up a small 0.2% in January and was unchanged when volatile food and energy prices were removed.

The government said Friday that the overall economy, as measured by the gross domestic product, grew at an annual rate of 5.9% in the final three months last year, strongest growth in six years. However, economists believe that growth spurt, powered by a swing in business inventories, has slowed sharply since then.

Top forecasters surveyed by the National Association for Business Economics believe the economy is expanding at about half the fourth-quarter pace in the current January-March quarter. They expect GDP growth will remain around 3% the rest of the year. It is this modest growth that has led economists to believe little progress will be made this year in reducing the nation’s jobless rate, currently 9.7%.

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