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Fears of EU Debt Hitting US Economy May Be Easing

The economic recovery is gaining strength from the biggest rise in construction spending in nearly a decade and the 10th straight month of expansion for manufacturers.

The two positive reports eased some fears that the debt crisis in Europe might be starting to stunt the U.S. economic rebound.

"The recovery is still on track," said Brian Bethune, a senior economist at IHS Global Insight. While Europe's troubles will put a drag on profits at U.S. companies that do business overseas, Bethune said, "it's not going to be a show-stopper."

Jeff Titcomb | Photographer's Choice | Getty Images

The burst in April construction spending reported Tuesday by the Commerce Department sent a promising signal for an industry that was among the hardest hit during the recession. The 2.7 percent increase was spread across all major sectors.

But temporary government incentives fueled gains in two of three major categories. The economy will eventually have to manage with less government support.

In a separate report, the Institute for Supply Management, a trade group of purchasing executives, said its manufacturing index dipped only slightly in May from a nearly six-year high in April. But the 59.7 reading for May was well above the 50 level that indicates expansion. Export orders rose despite Europe's troubles.

The group's employment index, which measures employers' willingness to hire, rose 1.3 percent. That was the highest level since May 2004. New orders, a gauge of future production, were unchanged.

"The European fiscal crisis doesn't appear to have harmed the prospects of U.S. manufacturers, at least not yet," wrote Paul Ashworth, senior U.S. economist with Capital Economics.

John Silvia, chief economist at Wells Fargo, said: "It does look like there's sustainable economic growth in the U.S. for the time being."

Expiring tax credits for first-time homebuyers helped drive the 4.4 percent rise in home construction spending. And portions of the $787 billion stimulus package approved last year by Congress boosted government building 2.4 percent.

The other major sector, nonresidential construction, climbed 1.7 percent. That marked the first such advance since March 2009. The strength came from gains in private sector work on communications projects and power generation facilities. Construction of office buildings and the category that includes shopping centers fell.

Commercial building projects have suffered in the weak economy through rising loan defaults and tighter credit. That's made it harder for developers to get financing.

"The negatives that were depressing the market have diminished," said Zach Pandl, an economist with Nomura Securities in New York. Still, Pandl cautioned against reading too much into the month-to-month changes in individual industries.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the spike from the homebuyer tax credit is likely to fade. Buyers hoping to cash in on the government tax incentives had to have a signed sales contract by April 30.

Shepherdson discounted the unexpected rise in nonresidential activity. "These numbers are hugely unreliable ... and we expect a downward revision next month," he said.

Some in the industry are more optimistic. Luxury homebuilder Toll Brothers last week reported a narrower loss in its latest quarter and said it had seen a surge in orders. The company said the strength in orders was holding up in May even though the tax credits had ended.

"It appears our business has finally emerged from the tunnel and into a bit of daylight," CEO Robert Toll said. Still, he cautioned, "We don't expect housing to roar back right away."

Pulte Group, the nation's largest homebuilder, reported in early May that it was able to reduce its loss for the first quarter and expected to be profitable this year. That would mark a key turning point for the company, which has posted losses in 14 consecutive quarters.

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