First tentative signs of a US postwar recovery emerged Tuesday as US industries pulled out of a slump, housing sizzled and core prices edged higher, soothing deflation fears.
"It could be flagging a bit of a turning point here, with some sectors starting to show an improvement," said BMO Financial Group senior economist Paul Ferley.
US Federal Reserve policy-makers were still expected to trim interest rates next week as a preemptive blow against deflation, however, against the backdrop of a weak jobs market and sluggish economy.
Key data showed US factories, mines and utilities boosted output by 0.1 percent in the month to May, snapping two months of declines. Manufacturers alone pushed up production by 0.2 percent.
"Industrial activity seems to be stabilizing from the double-dip recession that has plagued the manufacturing sector for the previous nine months," Manufacturers Alliance chief economist Daniel Meckstroth said.
A declining dollar, low interest rates, tax cuts, and lower oil prices were combining to stem a production slump, he said.
Also, groundbreaking on new US housing projects surged 6.1 percent to 1.732 million homes last month, the government said, reflecting dogged strength in one of the economy's few pillars.
"We are buying like crazy. We will probably continue to buy homes because mortgage rates are even lower," said Naroff Economic Advisors president Joel Naroff.
US consumer prices were unchanged last month when compared to April but were up 2.1 percent from a year earlier.
Core prices, which strip out energy and food costs, rose by a nine-month record of 0.3 percent in the month, exceeding Wall Street expectations. Core prices were up 1.6 percent when compared to May 2002.
The White House welcomed the figures.
"This, combined to recent information pertaining to inflation, is another indication that deflation is something to keep an eye on but is not a serious worry," said White House spokesman Ari Fleischer.
Wall Street's Dow Jones industrials average of 30 top stocks recovered from an early slump to close 4.06 points higher at 9,323.02. The blue-chip index had gained just over 200 points Monday.
US Federal Reserve chairman Alan Greenspan and his colleagues are expected to cut the key federal funds target rate by 0.25 percentage points to a 45-year low 1.00 percent at a meeting from June 24-25.
Deflation, or falling prices, deals a double blow to economies by pressuring people to postpone buying until prices fall further and by raising real interest rates.
It is also very difficult to reverse deflation.
The sagging US labor market cast a cloud over the horizon, with unemployment rate at a nine-year high of 6.1 percent last month, said BMO Financial Group's Ferley.
US companies remained cautious about hiring in the third quarter, according to a survey by Manpower Inc conducted in April, at the height of the Iraq war and SARS disease outbreak.
Of the 16,000 employers surveyed, 20 percent planned to boost hiring, nine percent expected a decline in job prospects and 65 percent expected no change, it said. Another six percent were uncertain.
US Secretary of the Treasury John Snow said a US$350 billion tax cut enacted this year was boosting share prices, spilling over to the economy, even before it had been implemented.
"I am confident that the plan is going to have a serious impact on overall economic growth and job creation," he said at a forum in New York.
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