Factory activity fueling modest economic recovery

NEW YORK – Hopes that America's factories will help drive the economic recovery gained support Monday fromews that manufacturing activity grew in January to its strongest point since 2004.Other data, though, offered a reminder that the recovery remains fragile. Construction spending sank in December to its lowest level in more than six years. And gains in personal income and spending were too modest in December to suggest that consumers can fuel a strong rebound."Rightow we're getting a recovery," said Michael Gregory of BMO Capital Markets. "But you have to be skeptical. This kind of performance cannot be sustained unless we get those other areas that are still weak in the econoour to contribute to growth — housing, construction, real consumer spending."Manufacturing activity has become a pocket of strength, though some of it flows from temporary factors such as customerseeding to add to depleted stockpiles of goods.The Institute for Supply Management said its manufacturing index read 58.4 in January, compared with 54.9 in December. Analysts polled by Thomson Reuters had expected a level of 55.5. A reading above 50 indicates growth.New orders, a sign of future growth, jumped in January to its highest level since 2004. So did current production. Order backlogs grew, along with prices companies paid. Thirteen of 18 industries said they were expanding, led by the apparel, textile mills and machinery sectors.Manufacturers have been pumping up production to feed their customers' depleted stockpiles. The ISM said manufacturers' inventories contracted at a slower rate in January. Still, their customers' stockpiles fell to an all-time low.As their customers try to restock their shelves, manufacturerseed to ramp up production to match their demands. That could mean hiring more workers, which would help invigorate the economic rebound. ISM's employment measure grew last month."Production growth is finally beginning to tax existing work forces to the point where companieseed to expand employment, and, critically, have enough confidence to do so," said Pierre Ellis of Decision Economics.Last month, Oracle Corp. CEO Larry Ellison said the software company is hiring 2,000 people in theext few months to improve sales at Sun Microsystems, which it just acquired for $7.4 billion. At the same time, though, Oracle will fire about 1,000 people.AK Steel Holding Corp. said in January that it had hired someew employees as production improved to about 85 percent of capacity, compared with 45 percent six months earlier.Still, companies aren't hiring at a rate anywhereear enough to replace the more than 7 million jobs lost during the recession. The manufacturing sector has lost 2.1 million jobs."We're justot going to recapture those," said Wells Fargo chief economist John Silvia.Unemployment held at 10 percent in December and is expected to remain elevated for years. The Obama administration included a measure in its 2011 budget for jobs that would give businesses tax breaks to promote hiring. President Barack Obama has also proposed tax incentives for businesses to invest inew plants and equipment.The econoour is also benefiting as a weak dollar boosts exports to fast-growing countries in Asia and Latin America. Monday's report said exports grew more quickly in January, to 58.5 from 54.5 in December. Economists warn, though, that high unemployment and tight credit for small businesses could make the inventory bounce short-lived.Still, investors drew hope Monday from the positive signals in the economic reports. The Dow Jones industrial average surged about 80 points, or 0.8 percent, in early afternoon trading, and broader stock averages also rose.The Commerce Department report on construction said home building fell by the steepest amount in seven months, evidence that housing remains a weak spot in the economy. Spending onew homes, office buildings and highways fell 1.2 percent to a seasonally adjusted annual rate of