Glimmers of Good News
After a dismal run of economic data in March, Wall Street welcomed some encouraging updates on two key sectors on the first day of April. A closely followed gauge of U.S. manufacturing activity showed a bounce in March that, though small, was good news for the economy. And a report on U.S. construction spending showed a smaller than expected drop in February, along with upward revisions to the previous months.
Yet the construction components that drive the quarterly gross domestic product outlook were a bit weaker than expected, and the nonresidential sector has now posted three consecutive months of small declines. Overall, we have not revised our forecast of a zero figure for first-quarter gross domestic product.
Following is Action Economics' rundown of the two reports.
ISM Manufacturing Index
The Institute for Supply Management's U.S. manufacturing survey ticked higher in March, to 48.6 from 48.3 in the previous month. The March headline figure is consistent with the level of the other ISM-related sentiment surveys, as all continue to sit below the 50% threshold—implying that activity continues to contract.
The index remains within its narrow 48-51 band evident since August. That range lies between the 55-60 readings seen at times of rapid growth and the 40-45 readings typical of recessions. The index level was similar to the Chicago purchasing managers' index headline rise to 48.2.
New orders and shipments declined, while employment improved—although all three remained below 50%. The prices-paid component surged to 83.5 from 75.5, leaving the series at the highest reading since October, 2005.
The ISM data have not changed our expectations for the ISM non-manufacturing survey, which tracks the service sector. We expect the new composite headline at 49—essentially unchanged from 49.3 in February.
U.S. February construction spending dropped 0.3%, vs. economists' median forecast of a -1% decline. Back data for January were revised higher to -1% (previously -1.7%), while December was revised lower to -1.7% (previously -1.3%). This marks the fifth straight monthly decline for construction spending.
On a year-over-year basis spending declined 2.3% compared to 3% in January.
The big upward revision to January, and the higher-than-expected February reading, appear to present a more encouraging trajectory for the sector. Yet the upward revisions were entirely in the home-improvement residual of residential construction that will have no impact on our forecast of a flat first-quarter U.S. GDP figure.
Indeed, the residential "new" construction component of overall residential construction was actually a tad weaker than we assumed, with a 4.9% February drop that follows 4% to 5% declines in each of the prior three months, leaving a hefty 42% rate of decline for the first quarter overall. We will continue to project a 29% Q1 rate of decline in inflation-adjusted residential construction in the GDP report, which exceeds the 25.2% pace reported for the fourth quarter.
The nonresidential construction figures also provided some bad news, as the December and January figures were bumped lower to leave declines in both months, of -0.2% and -1%, respectively, before the -0.1% drop in February. Though these declines are modest, they have checked what was previously a powerful and surprising uptrend in this component over the past year that has buffered the impact of the housing market correction on the construction sector overall. We now expect a 6% rate of decline for real nonresidential construction in the first-quarter GDP report that would partly reverse the 12.4% growth rate of the fourth quarter.