Industrial production surges in May, housing production dips

WASHINGTON (AP) - Big industry production surged by 1.1 percent in May, the strongest showing in nearly six years, a fresh sign that manufacturers are on a firm recovery path and the national economy possesses good momentum.

The sizable increase reported Wednesday by the Federal Reserve came after a strong 0.8 percent rise in April. The 1.1 percent advance - better than the 0.6 percent rise that some economists were expecting - represented the biggest gain since August 1998.

Factory production - the biggest slice of industrial activity tracked by the Fed - rose by 0.9 percent in May, up from a 0.7 percent increase the month before.

"They say beauty is only skin deep, but this manufacturing recovery looks better and better the deeper you look at it," said Jerry Jasinowski, president of the National Association of Manufacturers. "There is no doubt that the manufacturing recovery is durable, deep and diffuse," he said.

Output at gas and electric utilities, which increased by 1.5 percent in April, went up by 3.3 percent, reflecting unseasonably warm weather, the Fed said. Mining production, however, dipped by 0.4 percent last month, following a 0.9 percent rise.

In other economic news, builders broke ground on fewer housing projects in May, but even with the decline the level of activity was quite brisk. Total housing permits were the highest in over three decades.

The Commerce Department reported that the number of residential units under way came in at a seasonally adjusted annual rate of 1.97 million last month. While that represented a 0.7 percent drop from April, the pace exceeded analysts' forecasts. They were calling for a construction rate of around 1.95 million units.

Moreover, the number of new housing projects started in April turned out to be higher than the government previously estimated. April's projects clocked in at a rate of 1.98 million units.

On Wall Street, stocks were mixed. The Dow Jones was off 1 point, while the Nasdaq was up three points in morning trading.

Total housing permits - a good barometer of current demand - rose by 3.5 percent in May to a rate of 2.01 million units, the highest level since February 1973. And permits issued for just single-family homes in May came to a record rate of 1.59 million units.

The pair of reports issued Wednesday suggested that the recovery continues to build momentum. The economy grew at a 4.4 percent annual rate in the first three months of this year and is expected to grow solidly in the current April-to-June quarter, economists say.

With the recovery firmly rooted and the labor market improving, economists widely expect the Federal Reserve to raise interest rates for the first time in four years on June 30.

For nearly a year, the Fed has held a key short-term interest rate at 1 percent, a 46-year low. Most economists believe the Fed will boost rates by one-quarter percentage point in June. A few, however, predict a bigger half-point increase.

Federal Reserve Chairman Alan Greenspan, appearing on Capitol Hill Tuesday, offered an upbeat assessment of the economy and the outlook for job creation. He also held to policy-makers' current forecast that inflation should be relatively contained and thus any interest rate increases ordered by the Fed would be gradual.

If policy-makers' forecasts turn out to be wrong, the Fed will take aggressive action to keep the prices and the economy on an even keel, Greenspan said.

On the housing front, builders are slightly less confident about home sales for June as well as the next six months, according to a monthly survey by the National Association of Home Builders.

Mortgage rates, while still low by historical standards, have been rising in recent weeks.

Rates on a 30-year mortgage rose to 6.30 percent last week, according to Freddie Mac, the mortgage giant. Some economists are predicting this benchmark rate will climb to 6.9 percent by the final quarter of this year.

Higher mortgage rates, however, aren't expected to clip the wings of the housing markets.

"All the ingredients are in place for a healthy housing outlook," said Bobby Rayburn, president of the National Association of Home Builders and a home builder from Jackson, Miss.

Some economists are forecasting sales of previously owned homes to set a new record this year and sales of new homes will finish up close to a record high. An improved labor market should support demand for homes, they said.

Separately, a report on wholesale prices for May, originally scheduled for release last week, will be issued Thursday, the Labor Department said.