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Factory activity in the U.S. Mid-Atlantic region turned positive in August and an index gauging the U.S. economy's prospects rose for a fourth straight month in July, indicating the recession was leveling out, according to two separate reports Thursday.
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The Philadelphia Federal Reserve Bank said its business activity index was at 4.2 in August versus minus 7.5 in July, exceeding even the most optimistic forecasts. This data broke a 10-month run of contraction, helped by a jump in new orders.
"The Philly Fed was a little bit of surprising good news. It adds to those who are hopeful of a recovery," said Kim Rupert, managing director, global fixed income analysis, with Action Economics LLC in San Francisco.
Economists polled by Reuters had forecast a median reading of minus 2.0, in a range of minus 8 to plus 3.
Any reading above zero indicates expansion in the region's manufacturing sector.
The survey covers factories in a region encompassing eastern Pennsylvania, southern New Jersey and Delaware and is looked at closely as one of the first indicators of the health of the U.S. manufacturing sector.
New orders rose to 4.2 from minus 2.2 in July, also the highest since November 2007. The employment index rose to minus 12.9 from minus 25.3 last month.
Respondents to the bank's survey were more optimistic about business conditions in the next six months, even though they looked for new orders to rise only marginally in that time.
Many economists have looked for a turn in the inventory cycle to mark the end of the recession, and the survey showed inventories at 0.3 in August against minus 15.4 last month.
"The combination of the inventory cycle, and the impact of special factors like the cash for clunkers (program), will probably see manufacturing sector data overstate the general improvement in the economy," said Alan Ruskin, chief international strategist at RBS Securities in Greenwich, Connecticut.
"Nonetheless, this data can be considered as solidly growth- and risk-friendly," Ruskin said.
The report helped U.S. equities markets hold early gains and kept Treasury prices on the defensive.
"After earnings season, both bulls and bears need to see evidence of whether the economy is continuing to show improvement," said Lawrence Glazer, managing partner of Mayflower Advisors in Boston. "This data would support that argument."
Also Thursday, the index of leading economic indicators, which is supposed to forecast economic trends six to nine months ahead, rose 0.6 percent to 101.6 after a revised 0.8 percent gain in June, a private research firm said.
Wall Street economists had forecast a rise of 0.7 percent after an initially reported 0.7 percent increase in June.
"The indicators suggest that the recession is bottoming out and that the economic activity will likely begin recovering soon," said the Conference Board's economist Ken Goldstein.
Data is a real-time snapshot *Data is delayed at least 15 minutes