A mixed bag concerning two key economic data points released Wednesday -- one showing continued problems in the nation's beleaguered manufacturing sector, the other a smaller-than-expected decline in construction spending.

First, the Institute for Supply Management announced that its manufacturing index increased slightly to 36.3 percent in March from 35.8 percent in February, in-line with the Bloomberg News survey estimate, but still at a level indicative of a pronounced contraction.

ISM readings above 50 indicate an economic expansion; below 50, a contraction. What's more, it was the 14th straight month that the U.S. manufacturing sector indicated a contraction.

The new orders index surged to 41.2 percent from 33.1 percent; the employment index rose to 28.1 percent from 26.1 percent; and the production index was basically unchanged at 36.4 percent.

Manufacturing's hurdles

The U.S. manufacturing sector is being hit by a formidable double-whammy, many economists agree. Factories are being hurt by the weakest domestic demand in decades and, more recently, by falling exports as the recession hits previously strong-growth emerging markets.

One March ISM report bright spot: the inventory index plummeted to 32.2 percent -- its lowest level in 26 years -- as manufacturers reduced production to cut inventory levels. Given reduced demand, those inventories need to decline to reduce excess supply, and the sooner inventories do, the sooner production expansion can resume.

Meanwhile, U.S. construction spending fell 0.9 percent in February, the U.S. Commerce Department announced Wednesday -- a decline not as large as the 1.5 percent dip forecast in the Bloomberg News survey -- but still indicative of weak construction conditions. Construction spending, which plummeted 3.5 percent in January, has now fallen for five straight months (pdf).

In February, private residential outlays fell 4.3 percent, single-family construction plunged 10.9 percent, multifamily dropped 2.1 percent. On the upside, nonresidential spending increased 0.3 percent, and public outlays rose 0.8 percent.

Economic Analysis: As noted, a mixed bag regarding ISM manufacturing data and U.S. construction spending, with little positive significance for investors. The ISM indicator rose, but at well below 50, it's still deep in contraction territory. True, inventories fell, but that metric must decline further before one can say factories will need to ramp-up production to meet demand.

Meanwhile, February construction spending fell less than expected, but given the housing's deep slump, and the roughly 10-11 month supply of new and existing homes on the market, it will take many months of substantial gains before one can argue that the construction sector is adding to U.S. GDP: construction activity is still a large net-negative for the U.S. economy.

Bottom Line: Both the ISM and construction data continue to show a U.S. economy in the midst of a pronounced recession. Further, unless there is a sudden surge in both business investment and consumer demand, with consequent hiring, it's hard to picture the U.S. economy entering a recovery before Q4 2009.


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