NEW YORK (CNN/Money) - Hot housing sector? You betcha! But even this pillar may not be enough to keep the economic recovery on a solid foundation. Because manufacturing appears to be crumbling, and that threatens to pull the rest of the economy down -- the past week's rally in the stock market notwithstanding.
Yes, data released Thursday show housing starts in September soared to their highest level since 1986 (!!!), with big gains across the country and a nearly 4 percent rise in new permits to start construction. But mortgage rates are now edging up, and if housing goes from "overheated" to "merely healthy" then the sector won't add all that much to the economy's growth rate -- at a time when the recovery needs all the help it can get.
If you want to see weakness, look at industrial production, a much more leading indicator of the economy. Think back to the autumn of 2000 when big companies like GE said business had hit a wall. That's also about the time industrial production turned negative, and by March 2001 we were in recession. Industrial production turned up in January of this year as businesses began to rebuild depleted inventories.
But now industrial production has FALLEN for two months in a row: down 0.1 percent in September and down 0.3 percent in August. And the weakness was widespread in September: cars, home electronics, business equipment, and more.
| Recently by Kathleen Hays
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And October is looking even worse. Today the "Philly Fed" (Federal Reserve Bank of Philadelphia) index of business activity fell deeply into negative, or contraction, territory. It hit -13.2 in October, its lowest level since last November. Granted this covers just the mid-Atlantic region, but we also saw a similar index for New York State turn negative this month. It's beginning to look like there isn't simply enough demand out there for any further inventory build-up.
That may be one reason we see new claims for unemployment benefits on the rise again. At 411,000 for last week, they aren't terrible -- but they aren't getting better. Does that point to recession? No, but some economy watchers think the tepid nature of the recovery leaves the U.S. recovery very vulnerable to external -- and uncontrollable -- shocks.
Bottom line: those manufacturing numbers and those potential shocks -- from snipers in Virginia to war with Iraq to nuclear weapons in North Korea -- don't bode well for the rally we're seeing now.
Kathleen Hays co-anchors Money & Markets, airing Monday to Friday on CNNfn, and appears throughout the day reporting on the economy and how it affects financial markets. As part of CNN's Business News team, she is also a regular contributor to Lou Dobbs Moneyline.
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