By MARTIN CRUTSINGER and DANIEL WAGNER
AP Economics Writers
WASHINGTON (AP) — Hopes that the economy can sustain its recovery drew support Wednesday from news that industrial ouput rose for a seventh straight month and home construction hit a six-month peak in January.
Analysts cautioned, though, that the gains in both sectors could falter if consumer demand weakens.
The report on industrial production from the Federal Reserve showed gains in all three major categories: manufacturing, mining and utilities. It was the first such collective show of strength since August. Manufacturing output rose 1 percent, led by a nearly 5 percent gain in auto production.
Manufacturing has been a big contributor to the early stages of the economic rebound. In the fourth quarter, for example, roughly two-thirds of growth came from a burst of manufacturing activity. Factories have been churning out goods for businesses that had let their stockpiles dwindle as a way to save cash.
A separate sign of strength came in a Commerce Department report on housing construction. Home building posted a better-than-expected increase last month.
Construction rose 2.8 percent to a seasonally adjusted annual rate of 591,000 units. That was better than the 580,000 annual pace economists were forecasting. Applications for building permits, a gauge of future activity, fell 4.9 percent to a rate of 621,000. That followed two months of sharp increases.
Also Wednesday, Federal Reserve policymakers forecast that unemployment will stay high over the next two years. They said it will take “some time” for the economy and the job market to return to normal. The policymakers did not spell out how long that would be. Previously, they suggested it could take five or six years for economic conditions to return to full health.
In its updated projections, the Fed said the jobless rate this year could hover between 9.5 percent and 9.7 percent and 8.2 percent to 8.5 percent next year.
The Treasury Department, meanwhile, said the federal budget deficit through the first four months of the budget year is running at a record-breaking pace. The red ink reflects the continued fallout from the recession and financial crisis. It highlights the challenges President Barack Obama faces in trying to get the deficit down to manageable levels.
In the meantime, U.S. manufacturers are benefiting “across the board” as companies rebuild inventories, creating especially robust demand for metals, chemicals and paper, said Thomas Duesterberg of the Manufacturers Alliance/MAPI, an industry group.
Still, companies will eventually let their inventories fall again unless consumers – who account for about 70 percent of the economy – spend more. Unlike past rebounds driven by the spending of ordinary shoppers, this one appears to hinge on spending by businesses, foreigners and – until it runs out – government stimulus.
Last month’s gains in home construction add to evidence that the industry is starting to sustain its recovery from its worst slump in decades. Still, analysts noted that most of the strength came from a jump in the volatile sector of apartment buildings. The much larger single-family category rose only slightly and didn’t make up for a sharp decline in December.
Overall housing activity remains sluggish. Construction is now 23 percent above its record low of April. But January’s seasonally adjusted annual rate of 591,000 is still far below a normal monthly construction rate in a healthy economy: An annualized rate of about 1.5 million single-family homes and apartments per month.
Patrick Newport, an economist with IHS Global Insight, said he doesn’t think construction will return to that pace until early 2012. He pointed to problems in the market for multifamily buildings, including high rental vacancy rates. Builders also are having trouble getting construction loans.
And economists cautioned that a housing recovery could stall if the government’s tax credits for home buyers expire as scheduled at the end of April. They also noted that the gains in industrial production, though encouraging, may provide only limited benefit to the broader economy.
“Unfortunately, activity in other sectors of the economy, such as housing and services, is still relatively weak,” Paul Ashworth, an economist at Capital Economics, wrote in a research note. “The problem is that the factory sector is now such a small part of the overall economy that the wider impact will be modest.”
The increase in home construction last month was led by a 10 percent jump in activity in the Northeast and an 8.9 percent increase in the West. Construction was up a smaller 1 percent in the South and 3.2 percent in the Midwest.
The strength in January pushed construction activity up 21.1 percent from the pace in January 2009. Even with last month’s gain, the annual rate of construction starts remains 72 percent below the peak reached in early 2006, when a speculative boom drove home building to unsustainable levels.
Construction of single-family homes rose 1.5 percent in January to a seasonally adjusted annual rate of 484,000. Far stronger was building of multifamily units. It surged 9.2 percent to an annual rate of 107,000 units.
On Tuesday, the National Association of Home Builders said its housing market index – a measure of builders’ confidence – rose two points to 17 in February, after having fallen for two months.
That increase in sentiment was likely influenced, in part, by a report this month that the nation’s unemployment rate fell in January to 9.7 percent – still high, but lower than the 10 percent rate in December.
In addition, mortgage rates are hovering around 5 percent, pushed down by a Federal Reserve program to buy mortgage-backed securities. And builders say they are also seeing a boost in the demand for homes coming from a government stimulus program. That program provides tax credits of up to $8,000 for first-time home buyers and up to $6,500 for current homeowners who decide to move.
But private economists worry that the gains in housing could falter if mortgage rates begin to rise once the Fed withdraws its support and once the tax credits expire.