US manufacturing, which suffered the most during last year's recession, is on a firmer footing, latest reports showed, and combined with stunning productivity gains and better consumer sentiment, demonstrate the start of a sound economic recovery.
"The recovery in the manufacturing sector means that the weakest part of the US economy is now on the mend," said Mark Vitner, senior economist at Wachovia Securities.
Four reports helped to reinforce views, flagging in recent days, that the Federal Reserve might raise rates in August. The Fed is next due to discuss interest rates on June 25 and 26.
Stocks initially jumped on the news on Friday but then weakened as investors feared political conflict over the weekend, notably between India and Pakistan. The Dow Jones industrial average closed up 21 points. The dollar also gained strength from the data finishing the day around 0.9333 against the euro and at 124.28 yen.
Manufacturing in the Midwest jumped to a three-year high in May, according to the National Association of Purchasing Management-Chicago. Its index surged to 60.8, the highest level since April 1999. Last month, the index came in at 54.7.
The reading in May marked the fourth consecutive month above 50, which points to an expanding regional manufacturing economy. A reading below 50 signals contraction.
"The recovery in the manufacturing sector means that weakest part of the US economy is now on the mend," Vitner said.
Meanwhile, the Commerce Department said orders for US manufactured items in April posted their biggest rise since October 2001, gaining a larger-than-expected 1.2 per cent to $323.87 billion.
That report also showed that business investment, closely watched by Fed policymakers because it is crucial for a sustained recovery, is on the mend.
Orders for machinery rose 4.5 per cent in the month, their biggest rise since March 2000 while orders for electrical equipment and appliances were up 9.6 per cent. Demand for computer and electronic products was up three per cent.
"The third cylinder of the economic engine - capital spending - has really begun to fire and this is a signal of improving business confidence," said Sung Won Sohn, chief economist at Wells Fargo.
There was other good news for the economy. A Labour Department report showed productivity rocketed ahead in the first quarter, rising 8.4 per cent as profit-seeking American businesses squeezed more out of their workers. This met expectations even though it was slightly below the previously reported 8.6 per cent rise.
"Rising productivity means that corporate profits are beginning to improve and that is a necessary precondition for an improvement in employment," said Vitner.
The productivity report showed little evidence of inflation with unit labor costs, a closely watched gauge of wage pressure, dropping 5.2 per cent.
"These productivity numbers have important implications for the conduct of monetary policy and the performance of the economy," said David Resler, chief economist, Nomura Securities International. "They mean we can produce more and not have serious inflation problem come up."
Consumers also are doing their bit to underpin the recovery. Another report showed sentiment rose in May to its highest level in 1-1/2 years as a steadily improving economy and a measure of calm in the Mideast helped lift consumers' assessment of the present and future hopes.
The University of Michigan's final May consumer sentiment index rose to 96.9 from 93.0 in April, market sources said, beating expectations and slightly above the preliminary May reading of 96.0 released two weeks ago.
"The fundamentals for consumer spending are pretty healthy, so consumer spending will be another economic stabilizer," said Sohn.