02/15/2012 01:28 pm ET

Economic Data Warms Hearts, But Doesn't Change Minds

Wednesday morning's economic numbers may have been small potatoes, but they were fairly tasty nonetheless.

The numbers from the manufacturing and home-construction sectors were second-tier, and they certainly do not get the splashy attention of the monthly jobs report. But they generally topped expectations, and did not dent the growing sense among some economists and on Wall Street that the economic recovery is slowly gathering strength.

They also, however, did not paint a picture of an economy taking off like a rocket.

The first report, and arguably the least important, was the Empire State manufacturing survey produced by the New York Federal Reserve. It tracks factory sentiment for just one state, New York, so it is hardly a major indicator. But it is also the first hint we get of February factory activity, so economists pay attention.

And the number came in much stronger than expected, at 19.5, up from 13.5 in January, topping the consensus forecast of 15. This was the highest reading since June 2010. Some of the details in the report were less than terrific -- employment and new orders fell, for example -- but overall factory sentiment is at least moving in the right direction.

"We are, like many, reluctant to make broader statements after one report from one region, but the better than expected headline reading is part of the larger economic story; things are getting better and many economic data points have corroborated that idea," Dan Greenhaus, chief global strategist at New York brokerage firm BTIG, said in an email. "Today’s is just the latest."

A broader read of the national factory sector followed the Empire State report: the Federal Reserve's look at industrial production in January. The headline number came in lower than expected, flat-lining when economists had expected a 0.7 percent gain.

But beneath the hood, things looked much better. December's production numbers were revised upward by quite a lot, to a 1 percent gain from a 0.4 percent gain. That left the total level of production right about where economists expected.

What's more, the undershoot in January was almost entirely due to freakishly warm winter weather, leading to lower than expected output from utilities. Factory output rose 0.7 percent in the month, while utility output fell by 2.5 percent -- including a 5 percent drop in natural-gas output.

The numbers were enough to brighten the spirits of even fairly pessimistic economists, such as Paul Ashworth, chief U.S. economist at Capital Economics in Toronto. While making sure to warn that "we're still concerned that Greece's exit from the euro-zone sometime this year will stop the global turnaround in its track," he noted in an email that January marked the second straight month of strong factory output.

The decent numbers in January also helped ease Ashworth's concerns that the strong factory numbers in December were driven mainly by a desire for companies to hurry up and spend money on capital equipment -- forklifts and desktop computers, for example -- before a temporary tax break on such equipment expired at the end of the year.

"Indeed, it fits with the stronger survey evidence that suggests business investment growth will actually accelerate again in the first quarter," he added.

The third economic report of the morning was another sentiment survey, from the National Association of Home Builders. Its index of homebuilder activity jumped from 25 in January to 29 in February, the highest reading since May 2007.

These numbers are still far below their peak in the '70s at the top of the housing bubble, and any number below 50 means that more home builders think sales are bad than builders who think sales are good.

That did not stop Ian Shepherdson of the independent research firm HFE, who has been among housing's bigger optimists lately, from doing a bit of an end-zone dance.

"This is astonishing. We are bullish on housing, but after four straight increases in the index but no meaningful gain in new home sales or mortgage demand, we feared a correction in the survey this month," he said in an email.

"The story here is that pent-up demand is being freed by much easier mortgage conditions, low rates and rising employment," he added. "It's real."

So overall the data Wednesday kept alive the hopes of the optimists that the economy has turned a corner and is picking up steam in the new(ish) year.

But the data also did not change the minds of many pessimists. Economists will keep a wary eye on new factory orders in the months ahead, given the drop in new orders in February's Empire State survey. And lately sentiment numbers, or surveys, have been arguably stronger than real activity. Confidence is nice, but what people and companies do is more important than what they say.

"The data today are not really game-changing," said David Semmens, U.S. economist at Standard Chartered. "They're not strong enough to throw anyone off course."