Manufacturing Cools in U.S. as Government Cuts Loom: Economy

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Photographer: Andrew Harrer/Bloomberg

An employee inspects wool felt hats at the Bollman Hat Company in Adamstown, Pennsylvania.

Manufacturing grew less than forecast in March as orders and production cooled, highlighting the risk of a U.S. economic slowdown this quarter as federal budget cuts take effect.

The Institute for Supply Management’s factory index fell to 51.3 from an almost two-year high of 54.2 in February, the Tempe, Arizona-based group’s figures showed today. A reading of 50 is the dividing line between growth and contraction. Another report showed construction spending climbed in February, led by the strongest home-building outlays in more than four years.

The manufacturing report showed housing- and auto-related industries outpaced other areas last month, a sign consumer spending is bolstering the expansion, while exports grew at the fastest pace in almost a year. At the same time, a failure to reach compromise on ways to reduce the debt triggered $85 billion in across-the-board federal spending cuts on March 1, giving factories reason to take a guarded approach.

“The manufacturing outlook is positive, broadly, with a couple of cloudy areas,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, whose ISM forecast was the closest among those surveyed by Bloomberg. “It highlights the downside of reduced government spending but underscores a fairly stable private sector.”

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Photographer: Ariana Lindquist/Bloomberg

Systems electrical assembler Kevin Quick replaces the motor in an integrated reactor machine that sprays insulation in homes at the Graco Inc. manufacturing facility in Minneapolis, Minnesota.

Stocks fell as manufacturing slid, pulling the Standard & Poor’s 500 Index lower after reaching a record high last week. The S&P 500 dropped 0.5 percent to 1,562.17 at the close in New York.

Asian Manufacturers

Elsewhere today, confidence among big Japanese manufacturers in March improved less than economists estimated as companies said they’ll cut investment by the most since the global recession. In China, manufacturing expanded at a faster pace last month, indicating the world’s second-largest economy is stabilizing.

Another U.S. report today highlighted the risk from the budget reductions. Spending on construction projects rose 1.2 percent in February, paced by the highest level of homebuilding in more than four years, according to figures from the Commerce Department. The data also showed federal outlays were the only weak spot, falling in February for a second consecutive month.

“The upturn in housing starts is translating to a greater increase in outright expenditures, which is adding to GDP growth,” said Michelle Meyer, senior U.S. economist at Bank of America Corp. in New York, who correctly projected the gain in construction spending. “You’re still seeing a slightly upward trend. The increase was driven by single-family construction.”

Raising Forecasts

Economists at JPMorgan Chase & Co. in New York today raised their tracking estimate for first-quarter growth to a 3.8 percent annualized rate from 2.7 percent, reflecting the improving outlook for consumer spending and homebuilding. The world’s largest economy will grow at a 1.8 percent pace this quarter as the government cutbacks set in, according to the median forecast of economists surveyed by Bloomberg in March.

The median forecast of 69 economists surveyed by Bloomberg projected the U.S. ISM’s factory index would drop to 54. Estimates ranged from LeBas’s 51.6 to 55. The 2.9-point decline in the factory gauge was the biggest since July 2011.

The purchasers group’s orders gauge dropped 6.4 points to 51.4, the biggest retreat since June, and the production index decreased to a six-month low, today’s report showed.

On the more positive side, the group’s employment measure climbed to the highest level since June, and its export gauge showed the strongest reading in almost a year.

‘Slight Breather’

Manufacturers are taking a “slight breather,” reflecting caution about domestic demand, Bradley Holcomb, the ISM’s factory survey chairman, said in a conference call today.

While most member comments were positive, there was some concern about government policy and the effects that sequestration, or the automatic spending cuts triggered last month when lawmakers in Washington failed to reached compromise on reducing the debt, would have on the economy, said Holcomb.

Sequestration trims 5 percent from domestic agencies and 8 percent from the Defense Department this fiscal year.

Auto sales, which are projected to climb this year to the highest level since 2007, and housing have been a boom for manufacturers. Consumer spending climbed in February by the most in five months, even in the face of a 2 percentage-point increase in the payroll tax, according to Commerce Department figures issued last week. Gains in employment are among reasons for the pickup.

Manufacturers projecting a better outlook include Texas Instruments Inc. (TXN) The largest maker of analog chips raised the lower end of its forecasts for first-quarter sales and profit.

Orders Rising

“The stronger demand environment has continued,” Ron Slaymaker, vice president of the Dallas-based company, said on a March 7 conference call with analysts. “Quarter-to-date orders have been growing strongly.”

Manufacturing, which accounts for about 12 percent of the economy, has rebounded following a mid-2012 slowdown. Orders for durable goods jumped 5.7 percent in February, the most since September, after falling 3.8 percent the prior month, the Commerce Department said on March 26.

Federal Reserve policy makers have said they’re concerned the fiscal restraint may impede the expansion’s progress. The economy cooled to a 0.4 percent annual rate in the final three months of 2012, after growing at a 3.1 percent pace in the third quarter.

United Technologies Corp. (UTX), the maker of Pratt & Whitney jet engines and Otis elevators, is among businesses projecting economic growth will improve.

“The U.S. economy is better and it is going to continue to get better,” Gregory Hayes, chief financial officer of the Hartford, Connecticut-based company, said at a March 14 analyst meeting. “We’ve got another year-and-a-half or so probably of low interest-rate environment, which we could hope to capitalize on.”

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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