Data Show Economy Gaining Speed

U.S. factories cranked up output in May and construction spending surged to a third straight record high in April, according to reports released Tuesday that showed the economy gathering speed.

A measure of factory employment jumped to the highest level in 31 years as the nation’s factories marked a full year of recovery, raising hopes for a strong gain in manufacturing jobs in Friday’s national payrolls report.

Taken together, the data supported the case for a Federal Reserve rate increase this month.

The Institute for Supply Management said its index of national factory activity rose to 62.8 in May from 62.4 the previous month, beating expectations of a small decline to 62.

The index was not far off its two-decade high of 63.6 reached in January.

“Manufacturing activity has gone from being the U.S. economy’s laggard to one of the driving forces behind the current recovery,” said John Lonski, chief economist at Moody’s Investors Service.

“That big jump by the employment index for the month of May favors another reading on payroll employment which exceeds expectations,” he added. The ISM job component rose to 61.9 in May -- the highest since April 1973 -- from 57.8 in April.

Markets are awaiting Friday’s May payrolls report, which is expected to show an increase of about 216,000 nonfarm jobs and seal the case for a rate increase at the Fed’s late-June meeting.

The Commerce Department said construction spending jumped more than expected in April as rising mortgage interest rates spurred a rush to build.

Construction spending rose 1.3% to a seasonally adjusted annual $970.4-billion rate in April, and there were upward revisions to March.

Two of the three components -- private residential construction and public construction -- were at record highs in April.

“Construction spending is poised to add solidly to second-quarter gross domestic product,” said Steven Wood, chief economist at Insight Economics. “However, residential construction is likely to slow in the year ahead because of higher mortgage rates.”

Housing prices have yet to cool off despite the prospect of higher interest rates. Official figures on Tuesday showed average home prices rose 7.7% during the first quarter compared with a year earlier.