Manufacturing Contracts, but Rest of Economy Hums Along

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Nam Y. Huh/AP
By Lucia Mutikani

WASHINGTON -- U.S. manufacturing contracted in November for the first time in three years as the sector buckled under the weight of a strong dollar and deep spending cuts by energy firms, but robust automobile sales suggested the economy remained on solid ground.

Other data released Tuesday showed a sturdy increase in construction spending in October, which should help offset the drag from manufacturing on fourth-quarter economic growth. With manufacturing accounting for only 12 percent of the economy, analysts say it is unlikely the persistent weakness will deter the Federal Reserve from raising interest rates this month.

%VIRTUAL-pullquote-Manufacturing is being pummeled by the stronger dollar and the weakness of global demand, but the other 88 percent of the economy continues to perform well.%"Manufacturing is being pummeled by the stronger dollar and the weakness of global demand, but the other 88 percent of the economy continues to perform well. This won't prevent the Fed from raising interest rates at the mid-December meeting," said Steve Murphy, a U.S. economist at Capital Economics in Toronto.

The Institute for Supply Management said its national factory index fell to 48.6 last month, the weakest reading since June 2009 when the recession ended, from 50.1 in October. While a reading below 50 indicates a contraction in manufacturing, the index remains above 43.1, which is associated with a recession.

Factory activity has also been undercut by business efforts to reduce an excessive inventory build, which is putting pressure on new orders. The ISM said a gauge of new orders tumbled 4 percentage points to 48.9 last month.

Inventories at manufacturers continued to shrink and their customers reported stocks of unsold goods were too high for a fourth consecutive month.

Ten out of 18 manufacturing industries, including apparel, machinery, primary metals, electrical equipment, appliances and components and computer and electronic products reported contraction in November. Five industries reported growth.

Manufacturers cited dollar strength, slower Chinese and European growth and lower oil prices as headwinds. Recent data on business capital spending plans and factory output had offered hope that the worst of the sector's woes were over.

But with auto sales and construction spending remaining robust early in the fourth quarter, economists still expect U.S. gross domestic product to expand at around a 2 percent annual pace, almost matching the third-quarter pace.

Though November auto sales dropped to a seasonally adjusted annualized 18.19 million-unit pace from October's brisk 18.24 million rate, according to Autodata Corp., they kept the industry on track for record sales this year.

Strong Domestic Demand

"The good news is that the much more important services sector continues to do very well, benefiting from solid domestic demand. In that environment, the Fed will begin to raise interest rates at the upcoming meeting," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.

Fed officials meet on Dec. 15-16 and are expected to raise benchmark rates for the first time in nearly a decade.

Prices for U.S. government debt rose, while the dollar fell against a basket of currencies. U.S. stocks ended higher.

In a separate report, the Commerce Department said construction spending increased 1.0 percent to a seasonally adjusted $1.11 trillion rate, the highest since December 2007, after rising 0.6 percent in September.

Construction outlays were up 13 percent compared to October of last year. Spending in October was buoyed by a 0.8 percent rise in private spending, which touched its highest level since January 2008. Outlays on private residential construction hit their highest since December 2007.

Investment in private non-residential construction projects rose 0.6 percent to a near seven-year high, with spending on manufacturing plants rising a robust 3 percent.

Public construction outlays jumped 1.4 percent to a five-year high as a surge in federal government spending offset a dip in investment by state and local governments.

"Despite the free fall in oil patch activity, total construction in the rest of the economy is doing quite well," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

9 Numbers That'll Tell You How the Economy's Really Doing
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Manufacturing Contracts, but Rest of Economy Hums Along
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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