While Market Shakes, Economy Is Shown Reviving

Housing and durable goods orders data released Wednesday showed that the U.S. economic recovery continues to gain ground, and the reports should help allay fears that the economy risks stumbling back into recession, economists said.

Investors had other things on their mind on a day when news of major accounting fraud at WorldCom(WCOM - Cramer's Take - Stockpickr) was putting a dent in the stock market.

Durable goods orders , or orders for long-lasting goods such as missiles and washing machines, grew 0.6% in May, beating economists' expectations for a 0.5% increase and the previous month's 0.4% increase, according to the U.S. Census Bureau. Excluding transportation and semiconductors, new orders increased 0.6%. Year to date, new orders for 2002 were 2.9% below the same period a year ago.

New-home sales were a robust 1.03 million in May, on an annual basis, up 8.1% from the revised April rate of 951,000 and 16.3% above the May estimate of 884,000. Existing-home sales for May, released Tuesday, totaled 5.75 million, above consensus estimates of 5.63 million but down slightly from the previous month's 5.77 million

"The bulk of the data is not as depressed as the markets are," said Steven Ricchioto, U.S. economist at ABN Amro. "The data continues to suggest some recovery environment is unfolding, though it may not be as strong as some people hoped. But it questions a lot of the concern about the economy slipping into a double-dip scenario. It rules [that scenario] out," he said.

The durable goods numbers showed that while business spending is still sluggish, demand continues to outpace production. After 16 consecutive down months, durable goods inventories, excluding semiconductors, decreased $1.5 billion, or 0.6%, to $266.3 billion in May. This followed a 0.5% April decrease.

"If you look at durable goods orders and production, orders are still trying to catch up with demand on the production side," said Steven Wieting, senior economist at Salomon Smith Barney. "Inventory-to-sales ratios in today's report are at all-time lows. That's something that survives whatever potential shocks we face fairly well. Manufacturing has been very lean; the level of industrial production, excluding the IT sector, is at mid-1997 levels after five months of improvement. So the recipe for big fundamental retrenchment in manufacturing is when it's ramping up in excess of demand, so it's not that set of circumstances right now," he said.

Meanwhile, continuing strength in the housing market evidenced in new- and existing-home sales numbers suggested that recent dips in consumer confidence may be deterring consumers from spending on stocks, but it's not stopping them from spending altogether.

"Housing is a very powerful development," said Steve Ricchioto, U.S. economist at ABN Amro. "A huge amount of consumer spending is driven by housing. Even though the confidence numbers dipped, you can't say people are lacking confidence if they're spending money on homes -- that's a 30-year commitment," he said.

After weak consumer confidence, auto sales and retail sales numbers for May, some were worried the consumer had finally given up. But Wieting said other data suggest that spending remains strong.

"There was a lot of concern about May consumer data, but that is picking up in June. Just look at movie theater receipts, weekly chain-store sales data and some reliable forecasts on auto-related spending," said Wieting. "And look at housing. If the consumer were rolling over, housing wouldn't look like that."