Cooling factory activity hints at slowing economy

WASHINGTON Mon Apr 1, 2013 6:32pm EDT

Nathan Rogers works on the jet assembly line at Cessna, at their manufacturing plant in Wichita, Kansas March 12, 2013. REUTERS/Jeff Tuttle

Nathan Rogers works on the jet assembly line at Cessna, at their manufacturing plant in Wichita, Kansas March 12, 2013.

Credit: Reuters/Jeff Tuttle

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WASHINGTON (Reuters) - Factory activity grew at the slowest rate in three months in March, suggesting the economy lost some momentum at the end of the first quarter as the effects of tighter fiscal policy started kicking in.

Data so far this year had shown little sign that higher taxes, and the $85 billion in across-the-board government spending cuts that took effect March 1 known as the "sequester," had weighed on economic activity.

"It suggests the economy was probably starting to slow at the end of the quarter, possibly reflecting the impact of the fiscal headwinds coming from sequestration and higher taxes," said Millan Mulraine, a senior economist at TD Securities in New York.

The Institute for Supply Management said on Monday its index of national factory activity fell to 51.3 last month from 54.2 in February. A reading above 50 indicates expansion in the manufacturing sector. New orders, a key indicator of future growth, accounted for much of the drop in the index.

The ISM report was at odds with a separate report showing that factories gained steam in March on strong order growth, closing out the best quarter for the sector in two years.

Financial data firm Markit said its Manufacturing Purchasing Managers Index rose to 54.6 last month from 54.3 in February. A reading above 50 indicates expansion.

While the two surveys use the same sub-indexes, they assign different weights to the components.

Economists and investors placed more emphasis on the ISM survey, which has a longer history and has been generally a good gauge of overall U.S. economic activity.

U.S. stock prices fell in light trade, with the Standard & Poor's 500 index stepping back from last Thursday's record closing high. U.S. financial markets were closed on Friday for Good Friday.

The price for the longer-dated U.S. government bond rose, while the dollar fell to a near month low against the yen.

"We are beginning to see where the government spending cuts will reduce demand," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "In those sectors and parts of the country that will feel the wrath of sequestration, adjustments are being made."

ROBUST FIRST-QUARTER GROWTH EYED

The U.S. Labor Department employment report for March to be released on Friday could shed more light on the U.S. economy's health.

Though factory activity slowed last month, there were pockets of strength. Export orders approached a year high and factory employment was the highest since June.

In addition, both manufacturers and their customers maintained lean inventories, which economists said pointed to a ramping up of activity later this year.

Last month's pullback did not, however, change perceptions that economic growth in the first quarter accelerated after almost stalling in the last three months of 2012.

The upbeat picture for the first quarter was bolstered by a Commerce Department report on Monday showing that construction spending advanced 1.2 percent in February. Spending had declined 2.1 percent in January.

The construction report added to a series of other data that has suggested economic growth accelerated in the first quarter from the fourth quarter's anemic 0.4 percent annual pace.

Data on employment, consumer spending, industrial production and housing have been relatively strong.

Some economists raised their growth estimates for the January-March period in the wake of the construction report.

Macroeconomic Advisers lifted its forecast by one-tenth of a point to 3.6 percent. JPMorgan raised its estimate from 2.7 percent to 3.8 percent. Part of the increase reflected strong consumer spending.

The U.S. Commerce Department released the consumer spending report on Friday, when financial markets were closed.

Construction spending in February was boosted by a 1.3 percent rise in private construction projects. Spending on private residential projects increased 2.2 percent to the highest level since November 2008.

Part of the increase reflected renovations. The housing market is no longer a drag on the economy and residential construction contributed to growth last year for the first time since 2005. It is expected to do so again this year.

"Housing is catching fire," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "All the conditions are in place for further improvement with housing even with lingering risks. Housing will keep the economy going forward even with the fiscal constraints."

Spending on private nonresidential structures rose 0.4 percent after declining 5.9 percent.

Public sector construction spending increased 0.9 percent, rising for a second straight month. Outlays on federal government projects fell 1.1 percent.

State and local spending, which is far larger than federal projects, rose 1.1 percent. It was the second straight month of gain in state and local government outlays.

(Additional reporting by Luciana Lopez, Steven C. Johnson and Richard Leong in New York; editing by Neil Stempleman, Leslie Adler and James Dalgleish)

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Comments (12)
Crash866 wrote:
Your Monday Morning Reality.
“Hopefully this is an anomaly. This gives a pause in the recent bullish data we have been seeing,” Craig Dismuke, chief economic strategist at Vining Sparks in Memphis, Tennessee.

If you choose to reply to my comment can you reply logically without calling me a doomsayer or Obama hater? Notice how I didn’t mention poltics in my comment? Can you do the same? Try to rise above that…I know it’s hard for both sides.

Apr 01, 2013 11:03am EDT  --  Report as abuse
bobber1956 wrote:
It has finally gotten so bad they HAVE to admit it! The house of cards is starting to fall. He could not stave it off no matter how hard he tried or deflect the reality any longer. The market CAN NOT sustain prolonged 14,000 with this kind of national debt. We all know it…it is just a pipe dream and now it is about to crash on the democrats heads. Here is some common sense from a simple country boy. The US Government gets its money from The People, or borrows it from elsewhere and The People have to pay it back. Well guess what. The People that pay the bills and the debt cannot afford to pay the bills and the debt AND support a bunch of SELF-entitled bums. Now it is broken. Either the SELF-entitled bums go to work or it stays broken.

Crash866

Not a chance. Cannot comment to this without placing the blame right square where it belongs-obama. I will not place blame without a solution. #1-FOCUS ON THE ECONOMY!!! Then drop the gun control crap, drop the illegal alien amnesty crap, stop the giving radical Islam money crap, either blow N Korea up or leave it alone, Nuke Tehran, help Israel, bail on Europe, ban China’s imports, build the pipe line and keep the oil here, bring our troops home and use them to secure the mexican border, kick the UN out, help Jordan and Turkey prop up the Syrian Rebels, tell Putin and Karzai to kiss our a–, and STOP turning Americans against each other. In other words stop being obama, quit campaigning, and try being an AMERICAN President. After all that is what we are paying you to do. Yeah, stupid, even the ones that did NOT vote for you are paying your salary and giving you all the freebies and bennies.

Apr 01, 2013 2:39pm EDT  --  Report as abuse
NorthernLight wrote:
I’m no doomsayer, but I believe we will start to reap what we have sowed in bad economic policy (non-party affiliated) in short time.

“Monetary Injections” are a very short term and short sighted answer to a much deeper problem. What problem? Please, no one likes to ask the hard questions.

Expect a few massive bubbles to burst in the next 3 years.. and Obama will use the downturn (“never let a tragedy go to waste”) to give more money to his friends. We could even see a Cyprus styled bank tax to cover a fall in GDP (and corresponding tax revenue decrease). If you thought the 2008 bust was bad.. brace for impact.

Apr 01, 2013 2:57pm EDT  --  Report as abuse
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