Instant View: Fed's Kohn leaving; ISM misses expectations

NEW YORK (Reuters) - The U.S. manufacturing sector grew in February but at a slower rate than was expected, according to an industry report, while U.S. construction spending fell to its lowest level since June 2003 in January.

ISM:

CONSTRUCTION SPENDING:

Federal Reserve Vice Chairman Donald Kohn will leave the central bank when his term ends June 23, the Fed announced Monday.

KEY POINTS: * The Institute for Supply Management (ISM) said its index of national factory activity declined to 56.5 in February from 58.4 in January. The median forecast of 80 economists surveyed by Reuters was for a reading of 57.5. * A reading below 50 indicates contraction in the manufacturing sector, while a number above 50 means expansion. * The Commerce Department said construction spending dropped 0.6 percent to $884.13 billion, after falling by an unrevised 1.2 percent in December. * Economists surveyed by Reuters had forecast construction spending falling 0.7 percent in January. * Private nonresidential spending, suffering from high vacancy rates, tumbled 2.1 percent in January to $316.42 billion, the lowest level since November 2006, after falling 0.7 percent in December. It was the tenth straight month of decline.

KOHN:

KEY POINTS: * Kohn, 67, has been a member of the Board since August 2002 and served as its Vice Chairman since June 2006. * "The Federal Reserve and the country owe a tremendous debt of gratitude to Don Kohn for his invaluable contributions over 40 years of public service," Federal Reserve Chairman Ben S. Bernanke said.

COMMENTS:

ANDY BUSCH, CHIEF FOREX STRATEGIST, BMO CAPITAL MARKETS, CHICAGO:

"(Donald) Kohn's departure adds another luster of uncertainty surrounding the Federal Reserve and not at a great time. The question obviously now is who is going to replace him. That's when we are really going to see the Treasury and the forex markets moving. Until then, I expect reactions to be limited."

CRAIG THOMAS, SENIOR ECONOMIST, PNC FINANCIAL SERVICES, PITTSBURGH:

ISM: "It's below consensus but it's still a strong number, showing an expansion in the manufacturing industry. We've seen the manufacturing base opening factories and hiring and adding new shifts."

"One big variable is that inventory continues to be very lean. My sense is that with the rebuilding of inventory we will see the manufacturing expansion to continue. The weather situation is serious enough that it will cause volatility in these numbers until spring when everyone is back at work."

ZACH PANDL, ECONOMIST, NOMURA SECURITIES, NEW YORK

"It's been well-rumored among the street economists, people have been anticipating this, but it leaves a major hole in the FOMC. He is the member of the FOMC that has had the longest tenure. Communication-wise, he's second to none. He's the most clear communicator on the committee and I would include Bernanke in that count. He rarely says things that are misinterpreted, he picks his words very carefully. Particularly in a time when the Fed has some very difficult communications tasks ahead of it, having Kohn off the committee is going to be a tangible loss. This is the third vacancy on the committee...this leaves a pretty big vacancy.

"Pretty simply, the White House is busy. Until now, filling those two seats on the board had simply not been a priority. The ranks of people that could have been selected for these types of jobs is limited because of the public's mistrust of Wall Street types.

ISM: "This punctuates a streak of weak data and underscores the point that we are still in a relatively moderate growth environment. We had very impressive GDP growth in the fourth quarter. We are still in a moderate expansion... The manufacturing sector really has had a V-shaped rebound, maybe a mini-V, but it has had a very sharp rebound from its lows, and the ISM suggests that maybe that's going to cool down a little bit."

LOU BRIEN, MARKET STRATEGIST, DRW TRADING GROUP, CHICAGO:

"ISM was weaker than expected. The components were even a touch weaker, based on production falling about eight points and about a six point decline on new orders. So either this is a continuation of the weather story or this is a settling back of manufacturing after the inventory build. It is not clear yet, but the data is certainly weaker than expected."

BRUCE BITTLES, CHIEF INVESTMENT STRATEGIST, ROBERT W. BAIRD & CO, NASHVILLE:

"I don't think the numbers tell us much, even though both the ISM and construction spending were soft. I think the market will ignore them because the weather conditions were so bad in the period that this data covers. It's hard to tell if this data suggests weakness because we don't know what impact the weather had. My guess is that the weather was so bad it impacted this data, but we'll see some pend-up demand in March and April."

ROBERT BRUSCA, CHIEF ECONOMIST, FACT AND OPINION ECONOMICS, NEW YORK:

"Kohn has been at the Fed for so long as a governor as well as an economist. He has been steeped in the institution of the Fed. He has been the Bernanke's most important confidant. He has been a strong defender of the Fed governors as opposed to the Fed regional presidents.

"He has been as tough a member of the Fed to lose. I don't how you can replace somebody like him. He's been a powerful force on the board. Sometimes you just have to slow down. This could probably be a personal decision. He could work less and make a lot more on the Street.

"He's a very good economist. He has been the guy who circles around the Fed and the governors when things got tough and when interest rates got near zero. There were some district bank presidents who were miffed when that happened because they were left out of the process."

MICKEY LEVY, CHIEF ECONOMIST, BANK OF AMERICA:

"His depth of knowledge about the conduct of monetary policy, the operations and history of the Fed and the economy will be sorely missed.

"This makes three openings now on the Fed's Board of Governors. So in contrast to prior resignations, Don's retirement is potentially larger in its impact on the future conduct of monetary policy. But the real outcome depends critically on how the openings at the Board are filled."

LAWRENCE GLAZER, MANAGING PARTNER, MAYFLOWER ADVISORS, BOSTON:

"Kohn is the most visible Fed figure next to Ben Bernanke so this is pretty significant. You could argue that this is yet another signal of potential change in Fed policy.

"I'm sure the next thing people will want to know is who his successor will be and whether that affects the bias of Fed policy.

"Treasury yields have been moving higher all day. I don't know whether this news will have a meaningful impact."

ROB STEIN, MANAGING PARTNER OF ASTOR ASSET MANAGEMENT IN CHICAGO:

"I don't think it's going to make that much of a change from the Fed's current stance. He's been somewhat outspoken on the need to move the target range, but I don't think its a significant difference. I don't think this will have much of an impact on trading."

MARKET REACTION: STOCKS: U.S. stock indexes were little changed. BONDS: U.S. Treasury debt prices were steady. DOLLAR: U.S. dollar was little changed.