Manufacturing Weakness Persists; Worst May Be Over

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By Lucia Mutikani

WASHINGTON -- U.S. manufacturing activity in October hit a 2½-year low, but a rise in new orders offered hope for a sector buffeted by a strong dollar and relentless spending cuts by energy companies.

Other data released Monday showed construction spending rose in September, indicating the economy remained on firmer ground despite signs of consumer spending cooling.

Given that manufacturing accounts for only 12 percent of the economy, analysts said it was unlikely to influence the U.S. Federal Reserve's decision whether to raise interest rates this year.

%VIRTUAL-pullquote-We do not expect the manufacturing data will cause the Fed to push the first rate hike back into 2016.%"We are marginally encouraged by a pickup in the new orders, but export orders continue to contract. We do not expect the manufacturing data will cause the Fed to push the first rate hike back into 2016," said John Ryding, chief economist at RDQ Economics in New York.

The Institute for Supply Management said its national manufacturing index slipped to 50.1 this month, the lowest level since May 2013, from a reading of 50.2 in September. The index is barely hanging above the 50 mark, the dividing line between expansion and contraction.

Manufacturers continued to cite the dollar's strength and low oil prices as headwinds. The new orders sub-index rose to 52.9 last month from 50.1 in September, but export orders continued to contract. There were modest improvements in supplier deliveries and backlog orders.

In addition, there was a decrease in the share of customers who believed inventories were too high, and the stock of unsold goods at factories also fell. Efforts by businesses to reduce an inventory overhang have weighed on factory activity.

The employment index contracted in October for the first time in six months, hitting its lowest level since August 2009, suggesting more weakness in factory payrolls.

"Overall, we view the ISM report as consistent with our view that the manufacturing sector is moving past the worst of the slump reported early on this year, but that conditions will likely remain soft as we see continued negative effects from the stronger dollar," said Daniel Silver, an economist at JPMorgan in New York.

That upbeat assessment was evident in a separate report from data firm Markit showing a pickup in factory activity last month.

U.S. stocks rose on the data, while prices of U.S. government debt fell. The dollar slipped against a basket of currencies after two members of the European Central Bank's governing council made remarks that lowered expectations the ECB would increase its bond-purchase program next month.

Dollar Bites

Seven manufacturing industries, including furniture and fabricated metal products, reported growth in October. Nine industries, including apparel, primary metals, petroleum and coal products, electrical equipment, appliances and components, machinery and transportation equipment, reported contraction.

The dollar has gained 16.8 percent against the currencies of the United States' main trading partners since June 2014, squeezing the profits of multinational companies like Procter & Gamble (PG) and 3M (MMM).

At the same time, a plunge in oil prices has pressured revenues for oil field companies like Schlumberger (SLM) and diversified manufacturer Caterpillar (CAT).

In a separate report, the Commerce Department said construction spending advanced 0.6 percent to its highest level since March 2008, after increasing 0.7 percent in August.

Construction spending has increased every month this year.

Data last week suggested consumer spending lost momentum at the end of the third quarter, with consumption in September posting its smallest increase in eight months.

In September, construction spending was boosted by a 0.6 percent rise in private construction spending, which hit its highest level since January 2008.

Spending on private residential construction jumped 1.9 percent in September, also reaching the highest level since January 2008, reflecting gains in home building and renovations.

"These numbers bode well for residential investment in the fourth quarter," said Gregory Daco, head of U.S. macroeconomics at Oxford Economics in New York.

"We expect that gradually firming wage growth, continued employment gains, and very solid consumer confidence will strengthen housing demand and lead to stronger housing activity in the coming months."

Investment on private non-residential construction projects, however, fell 0.7 percent. Public construction outlays gained 0.7 percent, with spending on state and local government projects increasing 0.9 percent. Federal government outlays declined 1 percent.

9 Numbers That'll Tell You How the Economy's Really Doing
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Manufacturing Weakness Persists; Worst May Be Over
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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