Manufacturing Activity Remains Weak; Construction Spending Drops Sharply

MBA (5/2/2008 ) Velz, Orawin
The nation’s manufacturing activity declined again in April, according to the Institute for Supply Management (ISM) manufacturing survey. The manufacturing index remained unchanged at 48.6. A reading below 50 indicates a contraction in the manufacturing sector. Although this was the fourth reading below 50 in the past five months, the index is showing signs of stabilizing: manufacturing activity continues to slump, but the slump is not deepening.

Forward-looking components of the index suggest continued slow activity ahead. New orders were unchanged at 46.5, the lowest level since October 2001. While the production index rose slightly to 49.1, it showed back-to-back readings below the 50 threshold for the first time since 2003. Manufacturers continue to see export orders increase from strong demand for capital goods overseas, which has helped support the overall activity.

The employment component of the index declined 3.8 points to 45.4—its lowest since mid-2003. The component related to prices continued to show a worrisome trend, with the prices that manufacturers are paying for inputs trending up. The prices-paid index increased one point to 84.5 and has reached its highest reading since May 2004, surpassing the level seen in the aftermath of Hurricane Katrina. Elevated commodity prices, including oil, have pushed input prices up.

Despite its weak readings over the past several months, the ISM index has performed much better than it did during the recession in 2001. It dipped to a five-year low of 48.3 in February of this year, but has improved since. In the 2001 recession, the index reached its low at 40.8 in October and averaged 43.4 for the eight-month duration of the recession.

A separate report showed that construction spending fell 1.1 percent in March. The Department of Commerce revised total construction spending in February to a gain of 0.4 percent from an earlier report of a 0.3 percent drop. Public construction spending fell 0.8 percent in March. Private construction spending dropped 1.7 percent, as the 4.6 percent decline in private residential construction spending outweighed the increase in private nonresidential construction spending of 1.9 percent. This was the largest decline in private residential construction spending since May 1980. From a year ago, private residential construction spending has been consistently 19.9 percent lower. By contrast, private nonresidential construction spending was up 15.4 percent from a year ago.

Another report showed that personal consumption expenditures (PCE) increased 0.4 percent in March after a weak 0.1 percent gain in February. However, much of the gain was due to higher prices. Adjusted for inflation, real spending rose only 0.1 percent. Meanwhile, personal income increased 0.3 percent, moderating from a 0.5 percent gain in February.

The report showed that inflation, as measured by the PCE index, accelerated to 0.3 percent in March from 0.2 percent in February. Core prices (excluding prices and energy items) rose 0.2 percent. Over the past year, the core PCE increased 2.1 percent, accelerating from 2.0 percent in February, just exceeding the upper end of the Federal Reserve implicit target of 1.0 percent to 2.0 percent.
Overall, yesterday’s reports supported the post-meeting statement released by the Federal Open Market Committee on Wednesday, hinting at a pause in cutting interest rates. The Fed appeared to be less pessimistic about the economy, which has remained weak but has not deteriorated further. However, rising energy and commodity prices make the inflation outlook highly uncertain.