WRAPUP 4-Cooling factory activity hints at slowing U.S. economy

Mon Apr 1, 2013 4:30pm EDT

* Factory activity slows in March on weak orders
    * Markit survey shows acceleration in manufacturing activity
    * Construction spending rises 1.2 percent in February

    By Lucia Mutikani
    WASHINGTON, April 1 (Reuters) - U.S. 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 U.S. 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 U.S. 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 where 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.
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