Jul 2, 2002 4 min read

By Jeannine Aversa Associated Press Writer

WASHINGTON (AP) – Manufacturing – knocked down by last year’s recession – turned in its strongest performance in nearly 21/2 years in June, but spending on construction dipped to a five-month low the month before.

The latest snapshot of the economy Monday suggested the recovery remains on track but improvements are spotty, economists said.

The Institute for Supply Management’s manufacturing index jumped to 56.2 in June, the highest level since February 2000, and up from a reading of 55.7 in May. An index above 50 signifies growth in manufacturing, while a figure below 50 shows contraction. It marked the fifth month in a row that manufacturing expanded.

That’s good news for the national economy and for manufacturing, an industry that throttled back production during the slump and saw hundreds of thousands of jobs evaporate.

“Manufacturers are staging a valiant comeback … but that comeback has not developed to the point where factories are rehiring in any great numbers,” said economist Ken Mayland, president of ClearView Economics. “We’re close, but not quite there yet.”

ISM’s manufacturing index in June was stronger than the 55.5 reading many analysts were forecasting.

But construction spending turned out to be weaker than expected. The value of all construction projects dropped 0.7 percent in May to a seasonally adjusted annual rate of $852 billion, the lowest level since December, the Commerce Department said. Many analysts were predicting a 0.3 percent increase. The decline followed a 0.4 percent rise in construction spending in April.

May’s performance largely reflected a 3.1 percent drop in private builders’ spending on commercial projects, such as office buildings and industrial complexes, which fell to a rate of $173 billion. Spending on residential projects held steady.

Through the slump, the residential side of construction market powered ahead as low mortgage rates motivated home buyers.

However, the commercial side has been turning in lackluster performances as businesses cut investment in new plants and buildings. They probably won’t step up such investment until they feel more assured about the recovery, economists said.

“Production levels still aren’t high enough to trigger new plant construction. Inventories are still falling and some firms are still laying off thousands of white-collar workers,” said Kenneth Simonson, chief economist for the Associated General Contractors of America. “So, I don’t expect any pickup soon in warehouse or office construction.”

Nonetheless, economists were encouraged to see the ISM’s production index, a gauge of current output, rise to 61.4 in June, the strongest showing in three years.

“The strength in manufacturing might offset some of the weaker components of the economy like commercial construction and the possibility that the consumer sector might soften,” said economist Richard Yamarone with Argus Research Corp.

Citing uncertainties about the recovery’s vitality, Fed policy-makers left short-term interest rates at 40-year lows last week, the fourth time this year they held rates steady.

With interest rates remaining low, consumers might be motivated to spend more and businesses to boost investment in new plants and equipment. Both are crucial to the recovery.

The Fed, in a survey of business conditions around the country released in June, said that the economy recovery was expanding at a modest pace but that improvements were uneven.

The recovery, economists said, faces some possible risks.

Americans’ confidence in the economy, as measured by the Conference Board, fell in June to a four-month low, pulled down by accounting scandals and worries about jobs.

Economists worry that the stream of corporate accounting scandals could jolt confidence, making consumers less willing to spend and companies even more wary of making big commitments such as capital investments and hiring.

But economist Joel Naroff of Naroff Economic Advisors struck a more upbeat note: “With manufacturing now pitching in, we don’t need the consumer to carry the entire load,” he said.

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On the Net:

Manufacturing: http://www.ISM.ws

Construction: http://www.doc.gov/