Economy could rebound faster than expected

WASHINGTON – Sept. 2, 2009 – Manufacturing grew in August for the first time in more than a year and a half, suggesting a broad, stronger-than-expected recovery from the worst recession since the 1930s.

The Institute for Supply Management reported Tuesday that its much-watched manufacturing index grew from July to August for the first time in 19 months, rising to 52.9, the highest level since August 2007. Anything above 50 signals that manufacturing is expanding.

The institute says the figure corresponds to an overall economy growing at an annual pace of 3.7 percent, about twice as fast as economists have been predicting.

“It’s very good news,” says John Canally Jr., investment strategist at LPL Financial in Boston. “And it wasn’t just autos.”

Economists had worried that recent signs of life in manufacturing may have been warped by the government’s cash-for-clunkers program, which ignited car sales in August. But 11 of 18 manufacturing industries surveyed reported growth last month.

“Investors should smile at this number,” says Joel Naroff of Naroff Economics Advisors.

But he cautions that the Federal Reserve may read the report as a sign it should reverse course and start raising interest rates to contain inflation as the recovery gains speed.

“This is a favorite report for many at the Fed, and if the members start believing the recovery story is real, then the decision to raise rates will not be too far behind,” he says.

Naroff expects the Fed to raise rates in December or January.

Factory inventories have fallen 40 consecutive months, suggesting that manufacturers will have to crank up production to meet rising demand for their goods. “You’re hearing anecdotal evidence of people walking into stores and not finding what they need,” Canally says.

The report’s only sour note: Manufacturing employment was still shrinking in August, though more slowly.

The National Association of Realtors reported Tuesday that its index of pending home sales increased for a record-setting sixth-consecutive month in July, hitting the highest level since June 2007.

Overall, the new reports suggest a surprisingly robust recovery, Canally says. “This was the deepest recession since the Great Depression. You’re bound to get a big snap back.”

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