Recovery picking up as factory orders strengthen and home sales contracts rise in March

Factory orders strengthen, home sales contracts up

WASHINGTON — A surprisingly busy month for U.S. factories and a surge in home buying are the latest signs that the economic recovery is picking up.

Orders to U.S. factories rose 1.3 percent in March, the Commerce Department said Tuesday. That was much better than the 0.1 percent decline analysts had expected. Excluding the volatile transportation sector, orders gained 3.1 percent, the biggest increase since August 2005.

Widespread activity in many industries offset a big drop in commercial aircraft. The increase offers further evidence that U.S. manufacturers are helping drive the recovery.

A separate report showed that more people signed contracts on previously owned homes in March than was expected. The jump was in large part the result of tax incentives that have propelled the housing market this spring.

The National Association of Realtors said its seasonally adjusted index of sales agreements for previously occupied homes rose 5.3 percent from a month earlier to a reading of 102.9. It was the highest level since October and a 21 percent increase from the same month a year earlier. The index provides an early measurement of sales activity because there is usually a one- to two- month lag between a sales contract and a completed deal.

The two reports offered more evidence that the recovery is strengthening. They also follow a government report Monday that said consumers stepped up their spending in March by the largest amount in five months. As evidence of that trend, MasterCard Inc. on Tuesday said its first-quarter profit jumped 24 percent as more shoppers are feeling comfortable enough about the economy and their jobs to reach for the plastic again.

But Wall Street appeared to be more focused on the growing debt crisis in Europe. Stocks dropped sharply around the world over concerns that European countries would fail to approve a $144 billion bailout package for Greece. By early afternoon the Dow Jones industrial average was down more than 230 points, erasing a 143-point gain on Monday.

At the moment, manufacturing is the leading star of the economic rebound and economists are predicting that will continue for the rest of the year, helping to offset weakness in other areas. Manufacturers are benefiting not only from the rebound in the United States but also rising demand for U.S. exports as the global economy recovers at a faster rate than had been expected.

Factory orders have jumped in 11 of the past 12 months, and economist anticipate more gains in the coming months.

“Businesses slammed on the brakes too hard in reducing inventories during the recession,” said Tim Quinlan, an economist at Wells Fargo Securities. “Now that the recession is over, the shelves are bare and that means they have to ramp up their orders to restock. We are seeing pretty broadbased strength in a lot of industries.”

But Quinlan said factory orders are only 44 percent of their pre-recession peak from July 2008. Even with manufacturers producing more, Quinlan expects high unemployment and low housing values to slow economic growth.

“We are not out of the woods yet in terms of the job market,” he said. “The biggest ongoing burden for the economy is that about 10 percent of the workforce is out of a job and another 10 percent are not working as much as they would like to work. That will be a drag on growth.”

For March, demand for durable goods, items expected to last at least three years, fell 0.6 percent, a better showing than a preliminary report on April 23 which had put the decline in durable goods at 1.3 percent.

The overall durable goods number was heavily influenced by a big swing in commercial aircraft, a volatile category, which plunged 66.9 percent in March after having posted huge gains in the two previous months.

Total transportation orders were down 12.3 percent. That was the biggest drop since June of last year as a 2.7 percent rise in demand for motor vehicles and parts only partially offset the plunge in aircraft.

But excluding transportation, factory orders posted a 3.1 percent rise, the best showing since a 3.6 percent increase in August 2005.

The strength in other industries was widespread, Orders for primary metals, including iron and steel, increased 4.7 percent while demand for machinery was up 8.6 percent, led by a 28.1 percent surge in construction machinery.

Orders for computers and other electronics products increased 22.7 percent.

The report showed that demand for nondurable goods, products such as oil and chemicals, rose 2.9 percent in March. The strength in nondurables included strong increases in demand for petroleum, chemicals and tobacco.

The Institute for Supply Management reported Monday that its closely watched gauge of manufacturing activity rose to 60.4 in April, up from 59.6 in March.

That was the strongest reading in nearly six years and represented the ninth straight month that the index has signaled growth in manufacturing. A reading above 50 indicates manufacturing is expanding while readings below 50 signal that the factory sector is contracting.

Home sales have received a boost from the federal government’s tax credit of up to $8,000 for home buyers.

These incentives have stimulated the market, but the deadline to get a signed sales contract was April 30. Many analysts project sales will drop sharply in the second half of the year.

“Strength in the spring was all but certain,” wrote Dan Greenhaus, chief economic strategist at Miller Tabak. “A slump following the credit’s expiration is likely although the exact timing is difficult to predict.”

Some analysts expect prices to slump as well, especially if mortgage rates rise and more foreclosed homes hit the market.

Nevertheless, economists and real estate agents alike hope the economy will be strong enough to bring down the unemployment rate from the current 9.7 percent. If that happens, it “could be enough to stabilize the housing market,” wrote Jennifer Lee, an economist with BMO Capital Markets.