U.S. manufacturing, construction sectors remain weak

The U.S. economy received more unpleasant information Monday concerning two key indicators: the Institute for Supply Management's manufacturing index inched up in February but still indicated a contraction in the sector, while construction spending in January fell more than expected.

The ISM's manufacturing index rose to 35.8 in February, well above the 33.8 Bloomberg News consensus estimate. The manufacturing index totaled 35.6 in January. ISM readings above 50 indicate an economic expansion; below 50, a contraction. Hence, the ISM reading below 50 for the13th straight month means the manufacturing sector of the economy has been contracting for more than a year. Further, even more telling, the index's employment sentiment component fell to 26.1% -- the lowest reading in the index's 61-year history.

Construction's doldrums continue

Meanwhile, U.S. construction spending fell -3.3% in January, on a seasonally-adjusted, annualized basis, the U.S. Commerce Department announced Monday (pdf), and that was worse than the -1.5% Bloomberg News consensus estimate. Construction spending declined -1.4% in December 2008 and -9.1% in the past 12 months.

In January, private construction declined 3.7% to a $682 billion annualized rate. Residential construction, which includes home building, fell 2.9% to a $291 billion annualized rate; non-residential construction dropped 4.3%, to $408 billion.

Economic Analysis: As noted, little positive news for investors from manufacturing and construction -- not good news for corporate revenue and earnings for 2009. The ISM indicator rose, but at well below 50, it's still deep in contraction territory. Moreover, the record-low employment sentiment reflects very weak hiring conditions as the recession approaches the 18-month mark. Meanwhile, January construction spending fell more than expected, but given the housing's deep slump, anything short of calamitous is considered a 'moral victory' regarding building. That said, the weak construction activity reflects the large supply of homes on the market due to the high foreclosure rate, and slack demand from U.S. home buyers.

Bottom Line: Both the ISM and construction data reveal a U.S. economy in the midst of a pronounced recession. Further, unless there is a sudden surge in hiring and a change in consumer sentiment to the positive, the housing sector is unlikely to add to U.S. GDP in 2009.
Read Full Story

From Our Partners