Manufacturing shrinks in August, construction down

NEW YORK - September 2, 2008 - Slow consumer spending and high gas prices have stalled manufacturing, and even some bright spots are expected to dim. Exports, which have propped up the sector, may slide as economies overseas slow. Meanwhile, construction spending is at a seven-year low that has spread from housing to nonresidential projects.

The Institute for Supply Management said Tuesday its reading for the nation's manufacturers fell to 49.9 in August from 50 in July, matching economists' expectations, according to Thomson/IFR. A reading below 50 signals contraction, while a reading above 50 signals growth.

The index has hovered near the 50 "boom-bust" line all year and industry groups say they expect similarly weak growth for the remainder of the year.

"With the global economy slowing and the rebate boost fading, we look for a mild sagging trend to unfold in the second half of the year," said Sherry Cooper, chief economist at BMO Capital Markets.

The second half of 2008 has started especially slowly for certain sectors. U.S. auto sales hit a 16-year low in July, and food manufacturers continue to struggle with inflation. Hormel Foods last month lowered its fiscal-year outlook and Smithfield Foods Inc., the nation's largest pork producer, swung to a first-quarter loss of $12.6 million, from a profit of $54.6 million last year.

"From an economic standpoint, we'll be chugging along, but not at any great rate here for a little while," said Patrick Kiely, president of the Indiana Manufacturers Association.

On the positive side, inflation appears to be slowing, although it remains elevated. The Institute for Supply Management's inflation index hit a six-month low and for the first time in months, there was more than one commodity coming down in price. Prices fell for copper, corn, fuel oil, natural gas and soybean oil, according to the survey.

The inflation reading for August was 77, down from June's 91.5, which was the highest since 1979.

Still, many manufacturers are still struggling to push through price increases that reflect the higher costs for everything from electricity to copper over the last year, said Paul McCarthy, strategy leader for U.S. industrial manufacturing transactions at PricewaterhouseCoopers. Some manufacturers that have been able to raise their prices are seeing little to no profit from the increases.

"In most cases, people are still struggling to deal with the price increases," McCarthy said. "This is just a huge adjustment, for everyone in the industry in the last three to six months."

The Institute for Supply Management's indexes for new orders, backlogs, inventories and employment all contracted, while exports expanded, helping to prop up the nation's paper makers, computer producers, chemical and steel companies, among others.

Stocks, which rose in morning trading, closed moderately lower after a drop in oil prices failed to ease Wall Street's uneasiness about the economy and the financial sector.

Separately, the Commerce Department said construction spending declined 0.6 percent in July, double the 0.3 percent decrease analysts had expected.

Housing activity fell for a 16th consecutive month, declining 2.3 percent to a seasonally adjusted annual rate of $357.8 billion. That was the lowest level since March 2001, the start of the last recession.

Nonresidential activity, which had been offsetting some of the weakness in the residential sector, also fell in July, dropping 0.7 percent to an annual rate of $416.8 billion. It was the first setback in that category since December.

Debbie Brady, president of the Southeastern Lumber Manufacturers Association in Tyrone, Ga., said the short-term outlook for the lumber industry in the region is "fairly grim."

"Until we see a rebound in housing, we don't expect too much of a rebound for our industry," Brady said.

Other industries say flat inventories are fine with them.

Low inventories of steel mean that the metal makers will do well when the economy rebounds, said Thomas A. Danjczek, president of the Washington, D.C., Steel Manufacturers Association. At the same time, continuing weakness in the dollar is helping exports, while pipes and plates for the energy business, as well as structural steel, also are selling well.

"We're flat," Danjczek said. "It's OK to be flat because we've been doing well flat."

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