The economy and markets got off to a strong start in the new year as signs emerged Monday of gains in manufacturing, construction and employment.
The Dow Jones industrial average rose as much as 130 points on the news before trimming its gains to end 93 points higher at 11,671 — a two-year high that adds to last year's double-digit percentage gains for the Dow.
The market's upbeat start to 2011 was set off by a report showing gathering strength in manufacturing, but also reflects a string of other reports showing economic growth was accelerating as it entered the new year.
The brighter economic outlook that has seemed to unfold with each day's news has sent economists scrambling to raise their forecasts for growth in 2011 to between 3 percent and 4 percent on average from a previous blue-chip consensus forecast of 2.6 percent.
"We are moving from recovery to expansion in the economy," said John Silvia, chief economist at Wells Fargo Securities. "Economic growth in the U.S. economy looks sustained and there is no double-dip in the outlook."
The news has been music to the ears of stock investors, enabling all the major indexes to post double-digit gains last year on the back of a major year-end rally that handed the Standard & Poor's 500 index of blue-chip stocks its best December in 19 years.
Monday's nearly 1 percent gain in the Dow and the S&P 500 continued the trend and was a good omen for the stock market generally, coming on the first trading day of the year, analysts say.
Since 1945, the S&P 500 has ended the year in positive territory 74 percent of the time it posted gains in the first trading day, with an average annual gain of 10.6 percent, according to Birinyi Associates.
"While financial markets are always fickle, the economic fundamentals which support them improved in late 2010," a trend that seems to be continuing this year, said David Kelly, chief market strategist at JP Morgan Chase.
To take advantage of better growth this year, many investors are taking money out of bonds and putting it into stocks. That, in turn, is prompting forecasters to predict another year of solid double-digit gains in the S&P, of about 11 percent this year.
Monday's catalyst for the market, a report on manufacturing from the Institute for Supply Management, showed production and employment expanding in manufacturing, thanks to a revival of auto and equipment sales in the U.S. as well as robust growth in orders from overseas.
About the only thing negative in the report, Mr. Silvia said, was a jump in the prices that manufacturers paid for raw goods such as copper, steel, nickel, aluminum and oil. Those commodity prices have been rising rapidly as a result of fast growth in emerging countries such as China and India as well as the U.S. economic revival.
"The U.S. economy finished the year on a high note," said Harm Bandholz, an economist at Unicredit Markets, who recently revised his forecast for economic growth this year to 3 percent from 2 percent.
The improved outlook is not only a result of the gains in manufacturing, he said, but also an acceleration in consumer spending at the end of last year that produced the best Christmas selling season, by some estimates, since 2005.
Like other economists, Mr. Bandholz credits the lift from the $880 billion tax cut and unemployment benefits package passed by Congress last month, which will put another $150 billion into the pockets of consumers and businesses.
But he warned that the boost from the stimulus will be only temporary this year because it is financed with unsustainable federal deficits exceeding $1 trillion.
"The higher short-term growth comes at the expense of slower growth in the future," he said.
Also adding to the more bullish outlook Monday, the Commerce Department reported a 0.4 percent rise in construction spending in November, in what economists said could represent a turning point for the recession-plagued building sector.
Fueling the gain was the first increase in single-family housing starts since April, but economists expect housing construction to stay mostly flat this year and not contribute to economic growth because of a big backlog of foreclosed homes waiting to be sold.
Commercial construction continued to decline, but public spending on infrastructure projects such as roads and schools expanded by 0.7 percent under the influence of President Obama's first economic stimulus bill.
With the economic acceleration, investors are hopeful that another critical piece of the picture will fall into place soon: faster job growth.
A report last week showed a big drop in first-time claims for unemployment insurance to fewer than 400,000 for the first time in 2½ years. Markets are looking for confirmation of the lower jobless claims in a report out Thursday and a report on the overall job market to be released Friday.
Mr. Kelly said he would not be surprised if unemployment claims rebound some this week. Last week's report may have been a "fluke," he said, because it was a holiday week and the figures could have been distorted by the Labor Department's seasonal adjustments to the data provided by the states.
But there's no mistaking the firming trend in the economy overall, said Nigel Gault, chief U.S. economist at IHS Global Insight.
"The private-sector recovery has gathered more momentum, and will get an extra kick in 2011 from a further injection of fiscal stimulus," he said.
With improving confidence and spending among businesses and consumers alike, "we seem closer to the long-awaited 'self-sustaining' recovery, where employment and consumer spending move up together," he said.
Mr. Gault recently revised his forecast for 2011 to 3.2 percent from 2.4 percent, although he expects growth to tick down to 2.9 percent again in 2012 as the boost from the stimulus fades.
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