Manufacturing slows, construction rises

NEW YORK, March 1 (UPI) -- The Institute for Supply Management said Tuesday manufacturing activity grew at a reduced pace in February.

The ISM based in Tempe, Ariz. said the manufacturing-activity index for February stood at 55.3, which represented a slowing in activity from January's 56.4 reading. The index was 57.3 in December.

"February was another good month in the manufacturing sector," said Norbert Ore, who directs the survey for the ISM. "While the overall rate of growth is slowing, the overall picture is improving as price increases and shortages are becoming less of a problem."

Wall Street economists had expected February's reading to stand at 57. The survey does not, however, capture the size of the change seen by individual firms in the survey.

The Institute for Supply Management surveys nearly 400 manufacturing firms on employment, production, new orders, supplier deliveries, and inventories.

A composite diffusion index of national manufacturing conditions is constructed, where reading above (below) 50 percent indicate an expanding (contracting) factory sector. Export orders, import orders, backlog orders and prices paid for raw and unfinished materials are also measured, but these are not included in the overall index.

The ISM said in its report that most aspects of the manufacturing sector saw growth last month, albeit at a slower pace.

The group's new orders index slipped slightly to 55.8 after 56.5 in January, while the production index hit 56.7, from the prior month's 57.8.

On the inflation front, manufacturers faced the 36th straight month of rising pressure, although the pace cooled somewhat in February. The group's prices index was 65.5 in February, compared with 69 in January and 72 in December.

Manufacturing payrolls also grew at a softer rate, with that gauge ebbing to 57.4, compared to 58.1 in January.

Meanwhile, the Commerce Department reported Tuesday construction spending increased more than expected during January despite bad weather in parts of the nation as housing outlays and commercial building climbed.

Commerce said construction spending increased 0.7 percent in January to a seasonally adjusted annual rate of $1.047 trillion.

Spending rose a revised 1.2 percent in December; it was previously reported as rising 1.1 percent.

Wall Street had expected January spending to be rise 0.4 percent.

Construction Spending is the dollar value of new construction activity on residential, nonresidential, and public projects.

Construction spending has a direct bearing on stocks, bonds and commodities because it is a part of the economy that is affected by interest rates, business cash flow and even federal fiscal policy.

In a more specific sense, trends in the construction data carry valuable clues for the stocks of home builders and large-scale construction contractors. Commodity prices such as lumber are also very sensitive to housing industry trends.

Businesses only put money into the construction of new factories or offices when they are confident that demand is strong enough to justify the expansion. The same goes for individuals making the investment in a home.

A portion of construction spending is related to government projects such as education buildings as well a highways and streets.

Why investors are more concerned with private construction spending, the government projects put money in the hands of laborers who then have more money to spend on goods and services.

Analysts who forecast outlays to decline pointed to bad weather -- snowstorms in the Midwest and Northeast and flooding rains in the West.

The report showed residential construction spending rose by 0.5 percent to a seasonally adjusted annual rate of $582.3 billion, after a 1.5 percent increase in December.

Nonresidential construction spending rose 0.9 percent a second consecutive month. Outlays rose for schools, roads, communications structures and power facilities.

Private construction increased 0.6 percent to a seasonally adjusted annual rate of $805.7 billion, after a 1.2 percent advance in December.

Public construction spending increased, climbing 0.8 percent to $241.6 billion after a 1.5% advance the prior month. Federal government construction outlays fell 6.9 percent. State and local spending climbed 1.4 percent.

Meanwhile, Michael Moskow, president of the Federal Reserve Bank of Chicago, said the U.S. economy is growing at a healthy pace and has yet to use up the labor and industrial resources that were idled by the 2001 recession.

The Federal Reserve policymaker said the economy is growing at an annual rate of more than 3.5 percent, enough to shrink the so-called "output gap" of unused economic resources.

But that gap hasn't yet closed, he said, implying that the economic recovery hasn't yet reached the stage where inflation is likely to become a serious hazard.

"My own judgment is there still are excess resources in the economy, both in the labor market and in plants and facilities," Moskow said after a speech to the National Association of State Workforce Agencies.

"I personally think that there still is an output gap," Moskow said. "I think it is closing. I think we are growing above potential growth. But I don't think it has closed at this point."

The U.S. economy grew 4.4 percent last year, and employers expanded non-farm payrolls by 2.2 million jobs, the fastest rate in five years.

Fed policymakers, as a result, have begun to debate the extent to which the output gap has been closed. One policymaker has suggested the gap may already have closed, but most Fed officials think the economic recovery isn't yet complete.

Under the circumstances, Fed policymakers have said the pace of interest-rate increases now will depend on "incoming" economic data. The Fed has raised its key federal funds rate by a quarter percentage point at each of the last six meetings of its policymakers.

But private economists say it's likely the policymakers will opt to skip an increase in at least one of its meetings this year.