U.S. Economy: Businesses Expand, Consumer Optimism Rises

Consumer Optimism
Pedestrians carry shopping bags in New York, May 28, 2011. Photographer: Robert Caplin/Bloomberg

Businesses in the U.S. unexpectedly expanded at a faster pace in June and consumer confidence reached a 10-week high, signs that economic growth may pick up in the second half of the year.

The Institute for Supply Management-Chicago Inc.’s business barometer climbed to 61.1, exceeding the highest forecast in a Bloomberg News survey, from 56.6 in May. Readings greater than 50 signal expansion. The Bloomberg Consumer Comfort Index rose to minus 43.9 from minus 44.9.

Stocks climbed for a fourth day as the Chicago group’s figures indicated manufacturing is rebounding after a lull brought on by parts shortages tied to the March earthquake in Japan. The data underscore the view of Federal Reserve policy makers that the first-half slowdown will prove “temporary,” as fuel prices become less of a burden for companies and consumers.

“The headwinds from the supply-chain disruption might have started to ease,” said Conrad DeQuadros, a senior economist at RDQ Economics LLC in New York. “We’ll see a pickup in economic growth in the second half.”

The Standard & Poor’s 500 Index gained 1 percent to 1,320.64 at the 4 p.m. close in New York, also helped by the Greek parliament’s support for a European bailout. Treasuries declined, pushing up the yield on the benchmark 10-year note to 3.16 percent from 3.11 percent late yesterday.

Economists called for the Chicago barometer to drop to 54, according to the median forecast in the Bloomberg survey. Estimates of the 54 economists surveyed ranged from 49.5 to 58.5.

Orders, Production

The purchasing group’s gauge of new orders climbed to 61.2 in June from 53.5, while the production index increased to 66.9 from 56. Measures of employment, backlogs and inventories eased this month.

Stronger manufacturing may help the labor market rebound in coming months. More Americans than forecast filed first-time applications for unemployment benefits. Jobless claims dropped by 1,000 to 428,000 last week, the Labor Department said today. Economists surveyed by Bloomberg projected 420,000 claims, according to the median estimate.

The claims figures may be influenced by earlier-than-usual auto plant shutdowns. Carmakers that have had difficulty getting parts from Japan may be using the period as an opportunity to retool for new models.

As facilities close, the increase in the number of workers filing for unemployment claims may be distorting the government’s figures, economists such as Joe LaVorgna at Deutsche Bank Securities LLC said.

Regional Reports

Economists watch the Chicago index and other regional manufacturing reports for an early reading on the national outlook. The Chicago group says its membership includes both manufacturers and service providers, making the gauge a measure of overall growth. Its members have operations across the U.S. and abroad.

Today’s figure is at odds with regional factory reports from Philadelphia and New York that showed Japan’s earthquake-related supply shortages kept working their way through the economy this month.

The Federal Reserve Bank of Philadelphia’s index showed manufacturing in the region shrank in June for the first time in nine months, while the New York Fed’s report showed a contraction at factories this month as the so-called Empire State measure dropped to the lowest level since November.

The Institute for Supply Management’s monthly national factory index probably also declined in June, reflecting a slower pace of expansion, according to the median forecast of economists surveyed before the Tempe, Arizona-based group’s figures tomorrow.

Federal Reserve

Fed officials announced last week they will maintain record monetary stimulus to support the economy after completing a $600 billion bond-purchase program that was scheduled to end today.

“The economic recovery is continuing at a moderate pace, though somewhat more slowly” than policy makers had expected, according to a Fed statement on June 22. “The slower pace of the recovery reflects in part factors that are likely to be temporary,” such as supply chain disruptions stemming from the Japanese disaster in March and the jump in gasoline prices earlier this year.

Retail fuel costs that have dropped 11 percent from a 2011 high of $3.99 per gallon are relieving stress on Americans’ pocketbooks. Lower prices at the pump are soothing consumers coping with a cooling labor market that’s restraining incomes and spending.

The Bloomberg confidence survey showed all three components advanced. An index of consumers’ views of the economy increased to minus 79.2 last week from minus 80.1. The gauge of personal finances rose to minus 5.5 from minus 7.6 the prior week. The buying climate measure was little changed at minus 46.9, the best showing since January.

Consumer Spending

“Falling retail gasoline prices, which should free up approximately $42 billion in discretionary income, likely bolstered the outlook of consumers,” said Joseph Brusuelas, senior economist at Bloomberg LP in New York. Cheaper fuel “may provide needed support for consumer confidence.”

Stronger sales in emerging markets are benefiting manufacturers such as Glenview, Illinois-based Illinois Tool Works Inc.

China is a “very rapidly growing area for us,” Chief Executive Officer David Speer said on a conference call with investors on June 14. Brazil also is “an economy that’s got lots of interesting growth prospects and it’s an economy you definitely have to be in.”

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