Construction Spending Surges; Manufacturing Index Dips

Spending jumped 2.7% in April, while manufacturing sector cooled in May

WASHINGTON -- The economic recovery gained strength on the biggest rise in construction spending in nearly a decade and the 10th straight month of expansion for the manufacturing sector.

Temporary government incentives fueled most of the construction spending increases in April. Industry spending rose 2.7% with gains in all major sectors, the Commerce Department said Tuesday, June 1.

In a separate report Tuesday, the Institute for Supply Management (ISM), a trade group of purchasing executives, said its manufacturing index dipped slightly in May from a nearly six-year high in April. But the 59.7 reading for May was well above the 50 level that indicates expansion.

Export orders rose last month despite the debt crisis in Europe that threatens to spread.

"The European fiscal crisis doesn't appear to have harmed the prospects of U.S. manufacturers, at least not yet," wrote Paul Ashworth, senior U.S. economist with Capital Economics.

The news was welcomed on Wall Street. Stocks erased early losses after the two reports signaled a lift in the economic recovery. The Dow Jones industrial average rose about 40 points in midday trading after sliding in early trading.

Construction spending was boosted by a homebuyer tax credit, which helped residential construction surge 4.4% in April. The tax credit expired at the end of April.

Government spending also rose on the strength of federal support. The 2.4% increase was aided by the economic stimulus program that Congress passed in February 2009. State and local spending jumped 2.3% and federal spending rose 2.9%.

The other major sector, nonresidential construction, climbed 1.7%. That marked the first advance in this category since March 2009. The strength in April came from gains in private sector work on communications projects and power generation facilities. Construction of office buildings and the category that includes shopping centers fell in April.

Commercial building projects have suffered in the weak economy through rising loan defaults and tighter credit. That has made it harder for developers to get financing.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the spike from the homebuyer tax credit is likely to fade now that it has expired.

He discounted the unexpected rise in nonresidential activity and said it could possibly be revised away next month.

"These numbers are hugely unreliable ... and we expect a downward revision next month," he said.

Homebuilders have expressed optimism that construction will keep improving even with the expiration of the homebuyer tax credits.

Luxury homebuilder Toll Brothers Inc. reported last week that it had a narrower loss in its latest quarter and had seen a surge in new home orders. The company said the strength in orders was holding up in May even though the homebuyer tax credits had come to end.

PulteGroup Inc., the nation's largest homebuilder, reported in early May that it had been able to reduce its loss for the first quarter and expected to be profitable this year. That would mark a major turning point for the company, which has posted losses in 14 consecutive quarters.

In the manufacturing report, the group's employment index, which measures employers' willingness to hire, rose 1.3 percentage points to 59.8. That was the highest level since May 2004.

New orders, a gauge of future production, were unchanged at 65.7."We haven't lost much in the way of momentum," said Norbert Ore, chairman of the ISM's manufacturing survey on a conference call. "The manufacturing sector continues to move ahead."

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