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Chicago Factory Index Rises for Second Month

The measure ticks up from May and remains above the key 50 level.

Updated from 10:45 a.m. EDT

The latest Chicago-area factory sector report received a rather muted reaction from investors Monday, but the data could still indicate the economy is taking steps on the road to recovery, some experts say.

The Chicago Purchasing Managers' Index rose for a second consecutive month in June, reaching 52.5, but was slightly below estimates of 53, based on a


poll of economists. In May, the index was at 52.2. Any reading above 50 indicates business activity in the factory sector is picking up.


Manufacturing is better, but not booming," said Jim Sullivan, U.S. economist at Warburg Dillon Reade. "At least it's in the right direction, adding to the many signs the economy is starting to improve."

With fiscal and monetary incentives at work in the economy, Sullivan sees indications consumer and business spending will accelerate in the near term.

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Last week, the

Federal Reserve

lowered its benchmark overnight lending rate by 25 basis points to 1%, the lowest level in 45 years. Consumer confidence has been rising since the end of the Iraq war, while personal spending has also been increasing, although in a less-convincing fashion.

"People will be seeing the tax cut in their paychecks soon," said Sullivan, who thinks stronger demand from consumers will help convince business managers to boost production and capital spending, reinforcing the economic improvement.

Rating the Recovery

In last week's Federal Open Market Committee statement, the Fed stated that "labor and product markets are stabilizing" and that recent signs point to firmer spending.

"The catalyst for economic improvement will be capital spending," said Liz Ann Sonders, chief investment strategist at Charles Schwab. "The main driver of profits will be higher productivity, which can only come if companies replace their obsolete equipment."

Sonders interprets the fact that most companies aren't operating at full speed -- with capacity utilization currently at 74% -- as a sign that activity will begin to expand. She added that past spikes in gross domestic product growth correlated with a rise in capacity utilization from low levels.

But not all are as optimistic. "Today's figures show manufacturing is coming back a bit, but data pointing to a real recovery is still missing," said Delos Smith, senior business analyst at the Conference Board. "There's very little evidence consumers will stimulate the economy. We're still at a very high emotional state, with lingering terrorism concerns and businesses still sitting on their hands."