Midwest Industry Stirs, Consumer Still Buying In Hopeful New Signs; But View Remains Cautious; Factory payrolls are weak, Michigan sentiment index takes a downward turn.(A)

Byline: JED GRAHAM

Midwest factory activity surged in January even as consumer expectations fell to their lowest level since November 1993, two separate economic reports revealed Friday.

Yet despite their increasingly gloomy outlook, consumers continued to boost spending faster than their incomes grew in December, another report from the Commerce Department showed.

The barrage of economic reports suggested that despite growing concern over the economy as a possible showdown with Iraq looms, the manufacturing sector is recovering and the consumer still has the wherewithal and confidence to spend.

"The consumer's been there in spite of an increasingly wary outlook, but (it's) because of 40-year lows in long-term interest rates, record high refinancing and people taking out some of the increased equity in their homes," said Richard DeKaser, chief economist at National City Corp.

With consumer demand holding up, and inventory levels lean, the manufacturing sector is getting back in gear, he says.

The National Association of Purchasing Management-Chicago's survey of regional manufacturing jumped to 56.0 in January from 51.7 in December. That's the third straight month above the flat-growth level of 50, following a weak September and October.