Economic reports show recovery may be losing some steam
WASHINGTON (AP) – Manufacturing grew at a slower pace and construction spending dipped, suggesting an economic recovery that roared out of the starting gate may be losing a bit of steam. The Institute for Supply Management reported Wednesday that its index of business activity dipped to 53.9 in April from a revised 55.6 percent in March. Analysts had been expecting a reading of 55.0.
Because an index over 50 signifies growth in manufacturing, April’s figure indicates continued expansion in the sector, although at a slower pace than in March.
In another report, the Commerce Department said construction activity fell 0.9 percent in March, led by a sharp drop in spending on highways, hospitals, schools and other big government projects.
The decline came after a 0.7 percent rise in February. The March performance was weaker than analysts expected; they were forecasting a 0.2 percent dip.
Even with the drop, the level of spending – an annual rate of $874 billion – was still considered healthy. Economists were expecting construction activity to edge down with the return of colder weather in March. Mild weather bolstered construction activity in January and February.
On Wall Street, stocks pulled back from Tuesday’s big gains. By late morning, the Dow Jones industrial average was down 74 points and the Nasdaq index was down 34 points.
The economy – breaking out of the doldrums – grew in the first quarter at a 5.8 percent annual rate, its strongest performance in more than two years.
Economists estimate growth has slowed in the current quarter to a rate of around 3 percent to 3.5 percent. First-quarter growth was given a big boost by a slowdown in inventory liquidation by businesses, something that was fleeting. Because of that, analysts said, economic growth in the second and third quarters of this year should be moderate but still solid.
The economy actually shrank at a 1.3 percent rate in the third quarter of 2001, reflecting the toll of last year’s recession and the jolt of the Sept. 11 terror attacks. The economy moved back into positive territory in the final three months of last year, posting a 1.7 percent growth rate, an improvement but still a below-par performance.
Given the budding recovery, analysts believe the Federal Reserve will leave interest rates – now at 40-year lows- unchanged at its May 7 meeting.
How the economic recovery ultimately shapes up will depend on the behavior of consumers and a turnaround in business investment spending, which dropped during the recession, Federal Reserve Chairman Alan Greenspan has said.
Consumers kept buying throughout the slump, preventing the economy from sinking deeper into recession last year. As a result, there could be less pent-up demand coming out of the downturn, making for a less than sizzling rebound, Greenspan has cautioned.
Businesses, meanwhile, won’t want to crank up investment until they are sure the recovery is here to stay and their profits, battered by the slump, get better, economists said.
In the construction report, most of the weakness in March came from a 5.6 percent decline in spending on big government projects.
Private builders, meanwhile, trimmed spending on commercial projects in March by 0.3 percent. Spending was lower for industrial complexes and hotels and motels, while spending on office buildings edged up slightly.
Spending on residential projects rose 0.6 percent in March. Single-family homes posted a gain, but multifamily housing, including apartments, saw spending dip.
Low mortgage rates powered home sales to record highs last year.
Analysts expect activity to slow this year but still be in good shape.