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Economy Shows Strength

Manufacturing and mining gained strength in February, while housing remained extremely healthy, two government agencies said Tuesday.

Industrial production rose an unexpected 0.2 percent in February behind a 0.4 percent increase in mining output, the Federal Reserve said. Meanwhile, construction of single-family homes rose to a 20-year high in February as overall construction activity slowed 1 percent to a 1.799 million rate, the Commerce Department said Tuesday.

Economists surveyed by were expecting industrial production to be flat and home starts to fall to a 1.77 million pace. Capacity utilization, a gauge of future bottlenecks in the industrial sector, dropped a tenth of a percentage point to 80.3 percent, as expected.

The gain in industrial output confirms signals from the National Association of Purchasing Management and regional surveys that the 18-month slump in manufacturing may be coming to an end. Mining, which nearly collapsed as commodity prices (especially oil) fell, also may be recovering. The increase in mining output, attributed to coal production, was the first in year.

For manufacturers, the 0.2 percent boost in production came largely from a 0.5 percent gain in durable goods production. Output of nondurable goods fell 0.2 percent. Utility output declined 0.6 percent.

In the housing report, the Commerce Department said starts of new single-family homes rose about 1 percent to a 1.413 million rate, the highest since 1.46 million in December 1978, the department said.

Starts of all new housing units fell to a seasonally adjusted annual rate of 1.799 million, down about 1 percent from January's revised 1.81 million level, which was a 12-year high.

Building permits, an indicator of future construction, fell about 2 percent to a 1.745 million rate. Permits for single-family homes rose about 3 percent to a record 1.309 million.

Although interest rates have risen modestly, builders are not pulling back on their efforts to throw up as many houses as they can to meet consumer demand. Stocks of unsold new homes remain at a low 4-month supply.

Most economists expect housing to slow if interest rates remain at current levels or go higher. Mortgage rates are still at levels not seen in 25 years, although with inflation so anemic, real rates are approaching 6 percent.

The report comes two weeks before the next meeting of the Federal Open Market Committee, which is not expected to change monetary policy.

Star of economy

Housing has been the star of the economy for the past 18 months. Driven by low interest rates and a healthy economy, consumers have been buying new and old homes at record levels. In turn, home buying has fueled a boom in consumer durables such as furniture and appliances.

The Fed said production of appliances and home electronics boosted output of consumer durables by 0.9 percent in February. Meanwhile, production of business equipment rose just 0.2 percent ater being flat in January. Semiconductors and farm equipment showed major increases, offsetting declines in industrial equipment.

In the housing report, starts of new apartment units dropped 6 percent to a 386,000 pace in February. Starts of small buildings with four or fewer unit plunged 44 percent from January's unusual 57,000 rate to a more typical 32,000 pace.

Regionally, starts rose 36 percent in the Northeast to 209,000 and 8 percent in the Midwest to 349,000. Starts dropped 16 percent in the West to 369,000 and 2 percent in the South to 872,000.

Written By Rex Nutting, Washington bureau chief for CBS MarketWatch

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