U.S. Economy: Factories, Construction Spending Drop (Update2)

By Bob Willis


March 3 (Bloomberg) -- Manufacturing in the U.S. shrank at the fastest pace in almost five years and construction spending fell the most since 1994 as the economy moved closer to a recession.

The Institute for Supply Management's factory index dropped to 48.3 in February from 50.7 the previous month, the Tempe, Arizona-based group said today. Fifty is the dividing line between contraction and expansion. At the same time, the Commerce Department reported that spending on building projects slumped 1.7 percent in January, more than anticipated.

The collapse in housing is rippling through the economy as consumers pare spending and factories cut production of cars, furniture and appliances. Traders are betting the Federal Reserve will be forced to reduce its benchmark interest rate by 0.75 percentage point at its March 18 meeting.

``The evidence is piling up that the economy is slipping into at least a mild recession,'' said Scott Anderson, a senior economist at Wells Fargo & Co. in Minneapolis, who forecast the index would drop to 48. ``With the much higher food and energy prices and restricted credit, there are not a lot of avenues for consumers to continue to spend.''

Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York, today joined the growing number of forecasters saying the U.S. had slipped into a recession.

Recession Calls

Merrill Lynch & Co., Goldman Sachs Group Inc. and Citigroup Inc. are among the banks that had already projected the economy was contracting.

Economists surveyed by Bloomberg News forecast the factory index would fall to 48, according to the median estimate. Spending on construction was projected to decline 0.7 percent.

The figures had little impact on financial markets. The Dow Jones Industrial Average fell 0.1 percent to close at 12,258.9 in New York. Investors anticipated a weaker manufacturing report after the National Association of Purchasing Management-Chicago said last week that business activity weakened.

``Ceaseless talk of a recession continues to dampen the mood of consumers,'' Robert Toll, chief executive officer of homebuilder Toll Brothers Inc., said in a conference call on Feb. 27. ``This drumbeat, coupled with concerns over mortgages, the direction of home prices, and foreclosures, has kept pent-up demand on the sidelines.''

Building Slump

Homebuilding is in a third year of declines as sales weaken and builders halt new projects to lighten inventories. Stricter borrowing rules and lower demand are also restraining commercial developers, creating an even greater drag on growth.

``We are in a recession,'' billionaire investor Warren Buffett said in an interview with CNBC today. ``Across the board I am seeing a significant slowdown.''

The ISM's new orders decreased to 49.1 from 49.5, while a production measure dropped to 50.7 from 55.2. A gauge of supplier deliveries fell to 50.1 from 52.8 in the prior month.

The group's measure of prices paid decreased to 75.5 from 76 in January.

Today's factory survey corroborates other regional business polls in the past two weeks that showed factory activity, which accounts for about 12 percent of gross domestic product, contracted in February.

A Philadelphia Fed gauge showed the deepest contraction in seven years, while the Fed Bank of New York's economic index was the weakest in almost five years.

Orders Slump

Government data also have pointed to a slowdown. Orders for durable goods excluding transportation equipment fell in January for the third time in the last four months, Commerce said last week. Factory production stalled in January, with car output falling, the Fed said Feb. 15.

Declining home construction will drag on growth again this year, costing jobs and undermining the consumer spending that accounts for two-thirds of the economy. As property values decline, Americans feel less wealthy and buy fewer televisions and cars.

Sales at General Motors Corp., Ford Motor Co. and Toyota Motor Corp., the three biggest auto retailers in the U.S., fell in February from a year earlier, according to industry data issued today. General Motors and Ford each announced deeper reductions in production for next quarter.

Demand for cars is at the ``low end'' of the range forecast, said George Pipas, chief sales analyst for Ford, in Dearborn, Michigan, on a conference call last week.

Growth Forecasts

The economy will grow at a 0.5 percent annual rate from January through March, capping the weakest six months since the last economic slump in 2001, according to the median estimate of economists polled by Bloomberg from Jan. 30 to Feb. 7.

The Fed, which has lowered the benchmark rate by 2.25 percentage points since September, is ready to continue cutting borrowing costs if needed, Chairman Ben S. Bernanke told Congress last week.

He warned that risks to the outlook include ``the possibilities that the housing market or the labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.''

One of the few bright spots is record exports as a weak dollar and growing economies in countries such as China, Brazil and Mexico stoke demand for goods to modernize their infrastructure and production capacity.

The ISM's measure of export orders decreased to 56 from 58.5, showing foreign demand is still growing, though at a slower pace.

``We certainly have seen among some of our customers and even in our own business some benefits from a weaker dollar in terms of increased strength in an export capacity,'' Frank MacInnis, chairman of in Norwalk, Connecticut-based EMCOR Group Inc., a construction and facilities-management company, said in a Bloomberg Television interview last week.