U.S. business activity unexpectedly grows, confidence up

Business activity in the U.S. unexpectedly grew at a faster pace in July as the economy weathered a slowdown in hiring and household spending.

A barometer from the Institute for Supply Management-Chicago Inc. increased to 53.7, the highest since April from 52.9 in June. Readings greater than 50 signal growth. The median forecast of 50 economists surveyed by Bloomberg News projected the purchasing managers’ gauge would decline to 52.5.

The need to rebuild auto inventories may be giving a boost to manufacturing, which had been a key driver of the economic recovery.

The Federal Reserve is meeting this week to determine if more stimulus is needed as Europe’s fiscal crisis and the threat of more than $600 billion in U.S. spending cuts and tax increases at year’s end curbed demand.

Manufacturing is showing “modest improvement,’’ Harm Bandholz, chief U.S. economist at UniCredit Group in New York, said before today’s (July 31) report. “It’s not great but it’s also not that bad.’’

Projections in the Bloomberg survey ranged from 49 to 54.3.

Consumer spending stagnated in June, home prices rose in May from a month earlier and Americans gained confidence in July, other reports today showed.

Household purchases, which account for about 70% of the economy, were unchanged after a 0.1% decrease in May that was previously reported as little changed, according to figures from the Commerce Department. Americans used the biggest gain in incomes in three months to boost savings, indicating a weak handoff to the second half of the year.

CONSUMER CONFIDENCE RISES
Confidence among U.S. consumers unexpectedly rose for the first time in five months as Americans became more upbeat about job prospects later this year.

The Conference Board’s index increased to 65.9 this month from 62.7 in June, figures from the New York-based private research group showed today. Economists projected a reading of 61.5, according to the median estimate in a Bloomberg News survey. The report showed a gain in the share of consumers anticipating better labor and economic conditions in six months.

A pickup in the housing market and decreases in fuel prices are helping sustain consumer sentiment. At the same time, faster job gains are needed to spur consumer spending, which grew in the second quarter at the slowest pace in a year.

“Consumers are definitely getting some benefit from lower gasoline prices and that is freeing up some income,” Gus Faucher, a senior economist at PNC Financial Services Group Inc. in Philadelphia, said before the report. “Confidence is OK, it’s not great. We need better job growth.”

EARLY INDICATORS
Economists watch the Chicago index and regional manufacturing reports for an early reading on the national outlook. The group has said its membership includes manufacturers and service providers with operations in the U.S. and abroad, making the gauge a measure of overall growth.

The Institute for Supply Management’s national factory index, which will be reported tomorrow (Aug. 1), probably rose to 50.2 in July from 49.7 the prior month, according to the median projection in a Bloomberg survey. As in the Chicago survey, a reading greater than 50 signals expansion.

The Chicago group’s index of new orders rose to 52.9 from 51.9, which was the lowest since September 2009. The employment measure dropped to 53.3, the lowest level in a year, from 60.4 the prior month. The production gauge fell to 54.5 from 57.

The report continued to cloud the picture, adding to regional readings this month. Similar measure from the Philadelphia and Richmond Federal Reserve Banks showed areas contracted last month, while the New York Fed’s report showed activity picked up.

POLITICAL CONSIDERATIONS
Joseph Craft, president of Alliance Holdings GP LP, a coal producer in Tulsa, Okla., said while rising natural gas prices are helping coal markets, the European crisis and concerns about what action, if any, the U.S. Congress will take on taxes and spending are causing customers to hold back production and orders.

“Some people believe that everything will get delayed a year and whoever wins the presidency will deal with it next year without any major impact and others believe that politicians will go off the cliff here and create all kinds of consternations,” Craft said in a July 27 earnings call. “And until I think we get clarity, you’re not going to see utilities go out and start committing tonnage.”

The world’s largest economy grew at a 1.5% annual rate in the second quarter, down from a 2% gain in the previous three months, Commerce Department data showed last week. Consumer spending also climbed at a 1.5% pace, the weakest performance in a year.

Chairman Ben Bernanke and his colleagues on the Federal Open Market Committee, who have pledged to keep the benchmark interest rate low until late 2014, meet today and tomorrow.