Manufacturing, construction better than expected

WASHINGTON (AP) — Two reports out Tuesday showed weakness in the economy, but both were better than expected.
• A closely watched gauge of manufacturing activity contracted for a second month in March, though at a slower pace than in February, as manufacturers grappled with weakening order books and rising prices for raw materials.

The Institute for Supply Management's manufacturing index edged up to a reading of 48.6 in March. That was better than expected but still signaled that the manufacturing sector continues to shrink. A reading below 50 is a sign of contraction.

Economists polled by Reuters had expected the index to drop to 47.5.

Norbert Ore, chairman of ISM's manufacturing business survey committee, said that March capped "the weakest quarterly performance for the U.S. economy since the second quarter of 2003."

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He cited weakness in orders and the backlog of orders and added: "Additionally, manufacturers continue to experience heavy cost pressures as the prices they pay are still rising, even with slower overall demand."

Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI, a trade group based in Arlington, Va., said he believes the manufacturing sector is in recession.

"The combination of declining business activity and rising prices brings back the unpleasant memories of yesteryears' stagflation, he said. "A recession is always bad news for manufacturers."

Still, Meckstroth said that the weak dollar, which has supported exports and weakened imports, as well as government stimulus programs "should keep the 2008 recession on the mild side for the industrial sector."

Later Tuesday, Federal Reserve Chairman Ben Bernanke met privately with House Republicans, but participants said he steered clear of saying the country is in a recession.

House Minority Leader John Boehner, R-Ohio, told reporters beforehand that the meeting was called because of "great concern about where our economy is headed."

A trio of crises — housing, credit and financial — are threatening to push the country into a recession. Home foreclosures have swelled to record highs, employers are slashing jobs and financial companies have racked up billions in losses from soured investments in mortgage-backed securities. The situation has sent a tremor through Wall Street and official Washington and affected many Americans.

Bernanke's meeting with House Republicans came one day before he is slated to go to Capitol Hill to give lawmakers a fresh assessment of economic conditions.

At Tuesday's meeting, Bernanke didn't say the economy is in a recession, Rep. Adam Putnam, R-Fla. told reporters after the session.

The ISM said its new orders index registered 46.5 in March, compared with 49.1 in February. Ore said it was the fourth month new orders failed to grow.

The backlog of orders also contracted, with a reading of 47.5 in March compared with 45.0 the previous month.

The price index, meanwhile, soared to 83.5 last month from 75.5 in February.

One bright spot, Ore said, was export demand. The index measuring exports rose to 56.5 last month from 56.0 in February.

• Construction spending fell again in February as home building tumbled for a record 24th month.

The Commerce Department said overall construction activity dropped 0.3% to $1.12 trillion at an annual rate in February, reflecting weakness in home building and non-residential construction. Only government building projects showed a gain in February.

Analysts polled by Reuters expected spending in February to decline 1%.

Residential construction fell 0.9%. Residential activity has fallen every month since March 2006, a decline that underscores the severe downturn in housing.

Analysts believe housing will keep falling until a record glut of unsold homes is reduced. That effort is being hindered by mortgage foreclosures soaring to record levels, reflecting abuses in lending at the height of the housing boom.

The weakness in housing is combining with soaring energy prices and a severe credit crunch to push the economy close to recession.

The Bush administration is hoping an economic stimulus package will boost growth this spring and summer, when 130 million households begin spending their tax rebate checks.

Construction spending fell 1% in January and 1.7% in December.

In addition to the continued fall in housing construction, spending on non-residential projects dropped 0.1% in February after declines of 1% in January and 0.2% in December. Weakness in February reflected declines in office building, health care and schools.

Government spending was the one area of strength, rising 0.4% with federal spending surging 1.4% and state and local projects rising 0.4%.