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Economic Watch: Manufacturing Remains Weak, Construction Strong

May 2, 2016

By Evan Lockridge

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Two new readings of the U.S. manufacturing sector for April show the second quarter has begun with a slowdown in production and new business growth, while a separate report indicates construction activity is booming.

According to Institute for Supply Management’s monthly survey of purchasing and supply executives, manufacturing activity barely expanded during April. Its Purchasing Managers Index registered 50.8%, down a full percentage point from the month before. The number indicates growth in manufacturing for the second consecutive month, following five consecutive months of contraction in manufacturing.

A reading above 50% indicates expansion while one below 50% shows it’s contracting. This latest is weaker than a consensus expectation from a survey of economists made by MarketWatch.

The New Orders Index registered 55.8%, a decrease of 2.5 percentage points from the March reading. The Production Index registered 54.2%, 1.1 percentage points lower than the March figure.

While technically the second month of expansion, this sizable decline in manufacturing activity back down towards breakeven suggests a short-lived reprieve for producers, according to Lindsey Piegza, chief economist at Stifel Fixed Income, part of Stifel Nicolaus.

“Despite more favorable conditions as of late, including a reduced inventory overhang as well as a decline in the value of the U.S. dollar, production weakness appears to be carrying forward into the second quarter,” she said. “Federal Reserve officials remain optimistic for a near-term pickup in activity, needed improvement to justify a June [interest]rate hike following a weaker-than-expected first-quarter GDP report. However, lingering themes of lackluster activity could easily undermine growth beyond the first three months of the year, a scenario that would make it difficult for the Fed to raise rates in June or at all in 2016."

Meantime, a similar gauge, the final U.S. Manufacturing Purchasing Managers’ Index from the financial information services provider Markit, registered 50.8 in April. That's unchanged from its preliminary reading but down from 51.5 in March and only slightly above the 50 no-change threshold.

The latest reading was weaker than the average seen in the first quarter and shows the slowest improvement in overall business conditions in that past six and a half years, according to Markit.

Manufacturers recorded another modest increase in overall new work at the start of the second quarter, but the rate of expansion was the weakest since December 2015. Reduced export demand had a negative influence on manufacturing order books in April, with new work from abroad decreasing at the fastest pace for nearly one and a half years.

“The April PMI data suggest there’s no end in sight to the current downturn in manufacturing activity,” said Chris Williamson, chief economist at Markit. “The survey indicates that factory output is dropping at an annualized rate of approximately 3%, and factory headcounts are being culled at a rate of around 10,000 per month."

According to Williamson, rather than reviving after a disappointingly weak first quarter, conditions appear to be worsening in the second quarter, raising questions over whether gross domestic product growth will improve from the near stalling seen in the first three months of the year.

Construction Remains Bright Spot

A separate report on the construction business from the U.S. Commerce Department on Monday shows construction spending in March increased 0.3% from the month before to an annual rate of %1.137 trillion, its highest level since October 2007.

The increase was slightly less than a panel of economists were expecting. February’s performance was revised higher and January’s was changed to show a small drop rather than an originally reported gain.

Construction spending posted an even bigger 8% jump in March from the same time in 2015. During the first three months of this year, construction spending amounted to $240.4 billion, 9.1% higher than the level for the same period in 2015.

Pushing the overall March performance higher was a 1.1% surge in private construction, hitting its best level since October 2007, while spending on private nonresidential building also advanced to its best pace since October 2008. Public construction fell 1.9% as local, state and federal outlays declined.

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