Manufacturing ends slump
Income, spending rise in January; manufacturing expands in February.
March 1, 2002: 12:50 p.m. ET
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NEW YORK (CNN/Money) - Manufacturing grew for the first time in 1-1/2 years in February while consumer spending and personal income posted solid gains in January, government and industry reports showed Friday, the latest signs that the U.S. economy is rebounding from last year's slump.
The Institute of Supply Management (ISM), whose members buy materials for the nation's biggest companies, said its key gauge of manufacturing activity jumped to 54.7 in February from 49.9 in January, ending a year and a half of contraction. It was the first reading above 50 since July 2000. A number above 50 indicates expansion. Anything below that indicates contraction.
Separately, the Commerce Department said consumer spending rose 0.4 percent after a revised unchanged December reading and personal income also rose 0.4 percent, its largest rise in eight months.
"It's like the Queen said: We had a recession and no one came," said Wayne Ayers, senior economist at FleetBoston Financial. "The numbers are uniformly good. Not only did we not get much of a slowdown in consumer spending, but consumers are spending back at pre-recession trend levels, buying time for business capital spending to come back."
All three measures came in above forecasts by private economists, according to Briefing.com. Consumer spending is watched especially closely by economists since it fuels two-thirds of the nation's economic activity.
In another good sign for the economy, spending on construction projects jumped 1.5 percent in January, the biggest gain in a year, the Commerce Department said in another report. Construction spending, which rose 0.5 percent in December, has held up fairly well during the economic slump, aided by low interest rates and more recently, mild weather.
On Wall Street, stocks rallied sharply as investors bet that a growing economy would eventually boost corporate profits, justifying higher stock prices. The Dow Jones industrial average jumped 165 points to 10,270 at mid-session, while the tech-laden Nasdaq composite posted a bigger gain in percentage terms, adding about 2.5 percent.
In its report, the ISM said manufacturers' backlog of orders grew in February, ending 21 months of decline, though deliveries were slower for the second consecutive month and manufacturing employment continued to decline.
Orders for new exports grew for the second consecutive month while imports also grew, but at a slower pace than in January.
The recession that many economists say began last March probably has ended and could turn out to be the mildest in U.S. history, Federal Reserve Chairman Alan Greenspan told Congress Wednesday. But because consumers kept spending during the slump, their spending will not rise as quickly during this recovery, making it a bit less robust than usual, Greenspan and other economists said.
"We'll probably have a moderate-paced recovery. I couldn't agree more with the Greenspan's forecasts that it would be a sub-par recovery," Ayers said.
As if to underscore the point, a separate report Friday showed consumer sentiment stumbled in February for the first time in five months, as accounting fears on Wall Street and sluggish economic conditions dented Americans' hopes for a vigorous recovery.
The University of Michigan's consumer sentiment index slipped to 90.7 in February from 93.0 in January, according to Reuters, which quoted people who have seen the report. Forecasts were for a reading of 91.2.
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Still, some analysts say the economy might grow as much as 3.5 percent on an annualized basis in the first quarter. The government said Thursday that the economy grew by a faster-than-expected 1.4 percent annual rate in the fourth quarter of last year.
Analysts were surprised by that strength after the world's largest economy was jolted by the Sept. 11 attacks and a drastic downturn in business spending last year. Gross domestic product, the broadest measure of the economy, shrank at a 1.3 percent rate in the third quarter of last year.
Even though consumer spending picked up, Americans still were selective shoppers in January. They cut spending on cars and other expensive goods, as free financing and other incentives on new cars and trucks expired.
But spending on food, clothing, and other "non-durable" goods rose 1.2 percent last month after a 0.8 percent rise in December. Many retailers have discounted merchandise in an effort to motivate buyers. Spending on services rose by 0.5 percent for the second month in a row.
Americans' incomes got a boost from cost-of-living adjustments to retirees' Social Security checks as well as some other benefits payments from the federal government.
Disposable incomes -- income after taxes - rose 1.6 percent in January after a 0.2 percent December gain. Last month's rise largely reflects the impact of lower federal income taxes.
Since disposable incomes rose more quickly than spending, the nation's personal savings rate -- savings as a percentage of after-tax income - jumped to 1.8 percent from 0.6 percent in December. 
-- The Associated Press contributed to this report.
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