Manufacturing Up, Construction Down

Manufacturing activity rose and construction activity fell in recent months, according to new economic reports released Wednesday.

The Commerce Department attributed a 0.9 percent construction decline in March to a sharp drop in spending on highways, hospitals, schools and other big government projects.

The decline came after construction spending rose 0.7 percent in February. The March performance was weaker than analysts expected; they were forecasting a 0.2 percent dip.

However, April was the third straight month of manufacturing growth, but at a slower rate than the previous month, an industry group reported. The Tempe, Ariz.-based Institute for Supply Management (ISM) said its index of business activity dipped to 53.9 in April from a revised 55.6 percent in March. Analysts had been expecting a reading of 55.0.

Even with the drop, the level of construction spending — an annual rate of $874 billion — was still considered healthy. Economists were expecting construction activity to edge down with the return of colder weather in March. Mild weather helped bolster construction activity in January and February.

Because an index over 50 signifies growth in manufacturing, April's manufacturing activity figure indicates continued expansion in the sector, although at a slower rate than in March.

"The overall picture shows growth in manufacturing activity during April and a good beginning for the second quarter," said Norbert J. Ore, chairman of the ISM.

The ISM measure is closely tracked by economists because it offers an early reading on the health of the manufacturing sector. Its index is based on a survey of purchasing executives who buy the raw materials for manufacturing at more than 350 companies.

Most of the construction weakness in March came from a 5.6 percent decline in spending on big government projects.

Private builders, meanwhile, trimmed spending on commercial projects in March by 0.3 percent. Spending was lower for industrial complexes and hotels and motels, while spending on office buildings edged up slightly.

Spending on residential projects rose 0.6 percent in March. Single-family homes posted a gain, but multifamily housing, including apartments, saw spending dip.

Low mortgage rates powered home sales to record highs last year. Analysts expect activity to slow this year but still be in good shape.

How the recovery ultimately shapes up will depend on the behavior of consumers and a turnaround in business investment spending, which dropped during the recession, Federal Reserve Chairman Alan Greenspan has said.

Consumers kept buying throughout the slump, preventing the economy from sinking deeper into recession last year. As a result, there could be less pent-up demand coming out of the downturn, making for a less than sizzling rebound, Greenspan has cautioned.

Businesses, meanwhile, won't want to crank up investment until they are sure the recovery is here to stay and their profits, battered by the slump, get better, economists said.

The economy, breaking out of the doldrums, grew in the first quarter at a 5.8 percent annual rate, its strongest performance in more than two years. But economists estimate growth has slowed in the current quarter to a rate of around 3 percent to 3.5 percent.

Given the budding recovery, analysts believe the Federal Reserve will leave interest rates, now at 40-year lows, unchanged at its May 7 meeting.

Manufacturers have been hit hardest by the downturn in the economy, which officially slid into a recession in March 2001.

Wednesday's report and other recent data appeared to suggest that a recovery for manufacturers, though improving, would have rough spots ahead.

A report released last week by the Commerce Department showed that orders to U.S. factories for big-ticket goods, including cars and computers, fell 0.6 percent in March after a 2.7 percent gain in February. The decline was the first in past four months.

In Wednesday's report, of the 20 industries tracked by the ISM, 18 reported overall growth last month, Ore said. Among them were textiles, petroleum, furniture and primary metals.