A Fragile Economy

Twenty-two months into the recession, the U.S. economy remains fragile and uneven - with pockets of improvement amid continuing distress.

The disconnect was evident in a bevy of news yesterday from the government, industry groups, and Wall Street: Manufacturing and home sales showed some positive signs, but construction spending and delinquencies on auto loans were sour, and the Dow Jones industrial average fell 185.68 points, perhaps a sign that the stock market is ripe for a pullback after a six-month rally.

Even reports from the domestic automakers, which showed that August sales for most of them were the best in many months, contained a caveat. The gain came from the government's "Cash for Clunkers" program, which has now ended and may simply have taken sales away from future months.

President Obama, while saying that yesterday's manufacturing report was a sign that the economy was moving in the right direction, acknowledged the challenge remaining. "There is no doubt that we have a long way to go," he said.

As long as consumers remain hamstrung by weak pay and continuing job losses and are wary of ramping up spending, the economy might not be able to sustain a recovery.

Consumers did buy more cars last month, mainly because of the popular "Cash for Clunkers" program, which, for example, boosted Ford Motor Co.'s U.S. sales 17.2 percent over last year. Toyota Motor Corp. and Honda Motor Co. Ltd. sales also rose. But shortages of smaller vehicles weighed on rivals Chrysler Group L.L.C. and General Motors Co., both of which posted falling sales.

A look at yesterday's other economic reports:

Manufacturing. The better-than-expected August reading from the Institute for Supply Management showed the highest number for its manufacturing index since June 2007.

The ISM, a trade group of purchasing executives, said its manufacturing index rose to 52.9 last month from 48.9 in July. It is the first reading above 50, which indicates expansion, since January 2008. Analysts polled by Thomson Reuters had expected a reading of 50.5.

The new-orders component jumped nearly 10 percentage points to 64.9 in August, its highest since December 2004.

With strong new orders for two straight months, production should grow at "reasonable rates" for the rest of the year, said Norbert Ore, chair of ISM's manufacturing survey.

But Daniel Meckstroth, chief economist for the Manufacturers Alliance, a trade group, was cautious. "Manufacturing will continue to expand," but capital investment by businesses will decline because plants have too much excess capacity, he said. "You're going to see ups and downs."

Home sales. The National Association of Realtors said its seasonally adjusted index of sales contracts signed in July for existing homes rose more than 3 percent to 97.6. It was the sixth straight monthly increase and was 12 percent higher than in July 2008. Economists had forecast a reading of 96.5.

In the eight-county Philadelphia area, pending sales were up 15.1 percent in July from June, and increased 3 percent from July 2008, according to data from Prudential Fox & Roach HomExpert Report.

Construction spending. It edged down in July by 0.2 percent, the Commerce Department said. That compared with a flat reading forecast by economists.

The drop was centered in nonresidential construction, which fell 1.2 percent, led by a big decline in hotels, office buildings, and shopping centers. Construction spending by state and local governments also fell.

Construction of homes and apartments rose 2.3 percent in July, the best since last September.

Auto loans. The rate at which borrowers were late by more than 60 days in making auto payments rose in the second quarter 7.35 percent compared with a year earlier, credit-reporting agency TransUnion L.L.C. said.

Jobs. The July unemployment rate in the Philadelphia area fell 0.1 percentage point from June to 8.5 percent. But it remained higher than May's 8.2 percent and the rate of 5.3 percent in July last year.

Nationwide, the Labor Department said, the largest U.S. metropolitan areas were evenly split in July between those where unemployment rates rose from June and those where rates fell.