Manufacturing Activity Stabilizes; Construction Spending Falls

MBA (4/2/2008 ) Velz, Orawin
The nation’s manufacturing industry continued to contract in March, according to the Institute for Supply Management (ISM) manufacturing survey. The manufacturing index edged up to 48.6 in 48.3 in February. A reading below 50 indicates a contraction in the manufacturing sector. This is the third reading below 50 in the past four months. The report was better than expected as it contradicted results from several regional manufacturing surveys for the month, showing sharp declines in manufacturing activity around the country.
The ISM manufacturing index is based on a survey of purchasing executives at roughly 300 industrial companies. It includes 10 different sub-indices: new orders, production, employment, supplier deliveries, inventories, customers’ inventories, prices, new export orders, imports and backlog of orders.

Forward-looking components of the index suggested continued slow activity ahead. New orders declined 2.6 points to 46.5, its lowest level since October 2001. The production index fell two points to 48.7, the first reading below the 50 threshold for the first time since December. Manufacturers continue to see strong overseas demand for capital goods, but it’s small relative to weakening domestic demand.

The component related to prices showed a worrisome trend, with the prices manufacturers paying for inputs rising sharply. The prices-paid index increased eight points to 83.5 and now stands at its highest reading since the aftermath of Hurricane Katrina in October 2005. Elevated commodity prices, including oil, have largely pushed up input prices.

A separate report showed that construction spending fell in February for the fifth consecutive month. Total construction spending edged down 0.3 percent in February. Private construction spending dropped 0.5 percent, as a result of declines in both private residential (0.9 percent) and nonresidential construction spending (0.1 percent).

Over the past year, private residential construction spending has been 18.8 percent lower than a year ago. While private nonresidential construction spending fell for the third consecutive month, it has increased 13.2 percent from a year ago. Public construction spending rose 0.4 percent. The report suggests that residential investment would continue to subtract from economic growth in the first quarter, while nonresidential investment are unlikely to contribute appreciably to growth.

Stock markets rallied as Lehman Brothers Holdings Inc. reported that it raised $4 billion in capital through a stock sale, helping to calm investors and increasing confidence in the markets. UBS AG also announced yesterday plans to seek funds to replenish capital from mortgage-related writedowns.

As investors’ risk appetite increased, curbing demand for safe-haven Treasuries, Treasury prices declined and yields spiked. Treasuries extended declines in response to a better than expected ISM index. The yield on 10-year Treasuries rose 14 basis points and hovered around 3.55 percent by mid-Tuesday afternoon.