Jump in factory growth and consumer confidence gives US economy a lift as spending cuts loom

WASHINGTON - Busier factories and growing optimism among consumers could help the U.S. economy withstand the drag from government spending cuts and tax increases this year.

Manufacturing grew in February at the fastest pace in 20 months, according to a report Friday from the Institute for Supply Management. And a survey from the University of Michigan showed that consumer sentiment rose last month to its highest level since November.

The two reports follow other data that show strength in job growth and the housing market. Americans even spent a bit more in January compared with December, despite a sharp drop in income that partly reflected higher taxes.

"Consumers are spending, confidence is rising and manufacturing activity is accelerating," Joel Naroff, president of Naroff Economic Advisors, said in a note to clients. "Just about all of today's reports point to an economy on the rise."

Businesses and consumers appear to be shrugging off changes in federal policy that will likely slow the still-weak economy.

In January, Congress and the White House struck a deal that allowed Social Security taxes to rise on most Americans. The deal also raised income taxes for the nation's top earners.

And across-the-board spending cuts are set to begin Friday. The cuts could reduce government purchases and lead to temporary layoffs of government employees and contractors. They're expected to shave about a half-percentage point from economic growth this year.

"Many Americans are tired of the political wrangling and bickering," Chris Christopher, an economist at IHS Global Insight, said. "A certain level of political crisis fatigue has set in."

The economic data Friday was mostly positive:

— The Institute for Supply Management said its index of factory activity rose last month to 54.2, the highest since June 2011. Any reading above 50 indicates growth. The report showed a jump in new orders, higher production and more hiring at factories. Manufacturing has grown for three straight months, indicating that factories could help the economy after slumping through most of 2012.

— The University of Michigan measure of consumer sentiment rose to 77.6, the second straight monthly increase. The rebound in consumer confidence, seen in both the Michigan survey and another survey from Conference Board, suggests that some consumers have begun to adjust to smaller paychecks.

— Consumers increased spending 0.2 per cent in January from December but cut back on major purchases such as autos and appliances. Income plunged 3.6 per cent, though it followed a jump in December driven by dividends and bonuses paid early to avoid higher income taxes. The increase in Social Security taxes also lowered after-tax income.

— Spending on U.S. construction projects fell in January by the largest amount in 18 months, the Commerce Department said. Still, that the decline followed a nearly 10 per cent increase in construction spending in 2012, the first annual gain after five years of declines.

Investors seemed to focus Friday on the gains in manufacturing. Stocks rebounded after the ISM survey was released. The Dow Jones industrial average closed up 35 points, overcoming an early loss of 116 points.

One reason for optimism is that the job market is looking better.

Employers have added an average of 200,000 jobs a month from November through January. That was up from about 150,000 in the previous three months. And a drop in weekly applications for unemployment benefits suggests that employers have stepped up hiring further in February.

Some employers are even willing to pay more: After stagnating since the recession ended, hourly pay has been rising faster than inflation for the past three months. If such pay increases continue, they will help blunt the impact of the higher Social Security taxes.

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