U.S. Economy: ISM Index Unexpectedly Rose in March (Update6)

By Courtney Schlisserman and Bob Willis


April 1 (Bloomberg) -- Manufacturing in the U.S. contracted less than forecast in March, easing concern that slower consumer spending and business investment will cause a deeper economic slump.

The Institute for Supply Management's manufacturing index increased to 48.6 from 48.3 in February. Fifty is the dividing line between contraction and expansion. The Commerce Department reported in Washington that construction spending in February also dropped less than economists had projected.

Traders pared bets on a half-point interest-rate cut by the Federal Reserve this month after the reports, and stocks advanced. Exports, spurred by a falling dollar and expanding economies abroad, are helping sustain U.S. factories as American demand falters, the ISM report showed.

``The bottom line is this economy is still contracting; the good news is it's not a huge amount,'' Nariman Behravesh, chief economist at Global Insight Inc., a Lexington, Massachusetts, forecasting firm, said in an interview with Bloomberg Television. Data, along with Fed efforts to stabilize financial markets, point to a ``short and fairly mild'' recession, he said.

Economists forecast the ISM measure would fall to 47.5, according to the median of 71 projections in a Bloomberg News survey. Estimates ranged from 44.9 to 50.

Treasuries dropped to their lows of the day after the reports, with yields on 10-year notes rising to 3.56 percent at 4:22 p.m. in New York, from 3.42 percent late yesterday. The Standard & Poor's 500 stock index closed up 3.6 percent at 1,370.2.

Fed Rate

The chance of a half-point cut in the Fed's benchmark interest rate, to 1.75 percent, eased to 30 percent from 52 percent late yesterday. The central bank has lowered the rate 3 percentage points since September.

Fed Chairman Ben S. Bernanke will elaborate tomorrow on the economic outlook before the Joint Economic Committee of Congress.

The 0.3 percent decrease in construction spending followed a revised 1 percent drop in January that was smaller than initially reported, the Commerce Department said. Building of private non-residential projects including offices declined for a third straight month.

Homebuilding is likely to slow economic growth for a third year as sales continue to fall and builders delay new projects to work off almost 10 months of inventory. Stricter lending standards spawned by subprime mortgage defaults now are restraining commercial projects, which until recently were a source of strength.

`Shallow Event'

``The economy is entering a recession, but not falling off a cliff,'' said Robert Dye, senior economist at PNC Financial Services Group in Pittsburgh. ``So far, it looks to be a short and shallow event.''

The ISM gauge of new orders decreased to 46.5, the lowest since October 2001, while a production measure fell to 48.7 from 50.7. A measure of exports climbed to 56.5 from 56 in February and the employment index increased to 49.2 from 46.

Boeing Co. and jet-engine makers General Electric Co. and United Technologies Corp.'s Pratt & Whitney unit said in separate presentations March 18 they aren't seeing a slowdown in commercial aerospace demand even as fuel prices rise, credit markets tighten and U.S. and European economies weaken.

Plane Demand

The world's planemakers will deliver more than 28,600 aircraft valued at $2.8 trillion between 2007 and 2026, Randy Tinseth, Boeing's commercial-airplanes marketing chief, told investors at JPMorgan's Aviation and Transportation Conference in New York. More than half of GE's $172.7 billion in annual sales came from outside the U.S. in 2007.

Higher energy costs are also hurting companies' profits and their ability to spend on employment and on equipment and projects. The ISM's measure of prices paid increased to 83.5, the highest since October 2005, from 75.5 in February. Economists surveyed by Bloomberg News forecast the prices paid component would fall to 75.

Sherwin-Williams Co., the largest U.S. paint retailer, last week reduced its first-quarter and full-year earnings forecasts because of falling domestic sales and surging raw-material costs. Record oil prices are cutting profit margins for Sherwin Williams, which uses petroleum-derived chemicals as raw materials, Chief Executive Officer Christopher M. Connor said.

Corporate profits dropped 3.3 percent in the fourth quarter from the previous three months, the Commerce Department said on March 27. It was the second consecutive decline.

Stagnant Spending

Consumer spending, which accounts for more than two-thirds of the economy, has been stagnant since December and businesses have cut orders for long-lasting goods in the first two months of 2008. Plummeting confidence in the economy and lower profits indicate spending is unlikely to rebound in coming months.

J.C. Penney Co., the third-largest U.S. department-store chain, said last week that sales through the Easter holidays were ``well below expectations'' and that the rest of the year will be ``difficult.'' The retailer lowered its first-quarter profit forecast by at least a third and said sales at stores open more than a year would decline.

The manufacturing slump deepened in February as factories turned out fewer cars and appliances and made less furniture. Industrial production dropped a greater-than-forecast 0.5 percent, according to figures from the Fed issued last month.

The slowdown in spending and investment indicates the economy grew at a 0.1 percent pace in the first three months of the year following a 0.6 percent pace of expansion in the fourth quarter, according to the median estimate of economists surveyed by Bloomberg last month.