Mild weather heats buying

WASHINGTON — The warmest January in more than 100 years lured consumers out to the shopping malls to spend money at the fastest clip in six months, giving a strong boost to the economy as the new year began.

The nation's factories were also enjoying good times, with a closely watched gauge of manufacturing activity posting a strong increase in February.

Despite the warm weather, construction spending grew much slower than expected in January as home building, the economy's standout performer for many years, managed only a tiny increase.

Still, analysts said the various reports released Wednesday pointed to an economy that is shaking off blows from the hurricanes and soaring energy prices of 2005 to grow at a solid pace in the first three months of this year.

The Commerce Department reported personal spending surged 0.9 percent in January, the biggest advance in six months, reflecting strong demand for autos and other durable goods and for nondurable goods such as clothing.

"You can't keep a good consumer down, and the American household is one great customer," said Joel Naroff, chief economist at Naroff Economic Advisors.

On Wall Street, investors were cheered by the economic reports, where the Dow gained 60 points to push the 30-stock index back over 11,000.

Personal incomes rose a solid 0.7 percent in January. That reflected solid wage growth and a number of special factors, including a 4.1 percent cost-of-living increase for Social Security recipients and the start of the government's new prescription-drug benefit.

Without the special factors, personal income would have risen a smaller 0.4 percent.

Economists said the solid gain meant overall economic growth, which slowed to a 1.6 percent rate in the October-December period, was rebounding strongly to perhaps above 5 percent in the current quarter.

Also helping boost the economy is a resurgent manufacturing sector, which was the hardest-hit part of the economy during the 2001 recession.

The Institute for Supply Management reported its closely watched manufacturing gauge rose to a three-month high of 56.7 in February, up from 54.8 in January, as the index for new orders jumped to the highest level in 16 months.

"The economy retains ample momentum early in 2006," said Stephen Stanley, chief economist at RBS Greenwich Capital. He said the level for the manufacturing gauge was consistent with overall economic growth above 5 percent.

However, a third report showed construction spending managed only a 0.2 percent increase in January, the weakest gain in seven months and far below the 1 percent analysts had expected.

A big reason for the slowdown was a tiny 0.1 percent increase in private home building, the poorest monthly performance since an actual decline of 0.4 percent last June.

It was a further indication that residential construction, which has enjoyed five boom years, is beginning to slow.

Sales of both new and existing homes fell in January despite the warm weather. Economists predict continued increases in mortgage rates will slow housing further in coming months.

The bigger rise in spending in January compared with incomes kept the personal savings rate in negative territory at a minus 0.7 percent. That meant Americans spent more than their after-tax incomes, which forced them to dip into prior savings or increase borrowing.

For all of 2005, the savings rate registered a negative 0.4 percent, the first time it has been in negative territory for an entire year since the Depression years of 1932 and 1933.

Economists said this is the wrong time for a negative dip, considering the looming retirement of 78 million baby boomers.

Part of the reason for the dip in the rate of savings is that Americans who own homes felt more wealthy in recent years, given the huge increases in home values.

However, the Federal Reserve reported last week that even with the rise in home values, net worth — the difference between assets and liabilities — grew in 2001-2004 at the slowest pace in more than a decade.

An inflation gauge closely watched by the Fed showed that prices excluding energy and food rose by 1.8 percent for the 12 months ending in January, a slight improvement from a 1.9 percent increase for the 12 months ending in December.