Factory Activity, Construction Both Show Declines

U.S. manufacturing slumped to its weakest in nearly five years in February, reinforcing worries the world's largest economy is headed for recession, while a fall U.S. construction spending in January added to the gloom.

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The Institute for Supply Management said Monday its index of national factory activity fell to 48.3 in February from 50.7 in January. It was the weakest reading since April 2003, the month after the start of the Iraq war, and was also below the level of 50 that separates growth from contraction.

U.S. construction spending fell a sharper-than-expected 1.7 percent in January, led by a fall-off in private home building, government data showed in a report that marked a continued decline in the housing market.

Taken together, the reports are likely to heighten fears that the U.S. economy is bound for a recession, if it has not already fallen into one.

"The ISM manufacturing index is now in the no-man's land between weak growth and recession, but the problems elsewhere in the economy point more to the latter," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

After days of troubling economic news, financial markets took Monday's data in their stride, especially since the ISM did not turn out as weak as many had feared.

Stocks were lower but briefly managed to trim their losses after the ISM. The dollar was little changed on the day against the euro.

Government bonds, which usually benefit from weak economic news, were lower, wrong-footed by the slightly higher than expected ISM.

Managing Expectations

Wall Street expectations were centered around a reading of 48.0 for February, according to a Reuters poll.

"It is not a shock," said Kevin Logan, senior U.S. economist at Dresdner Kleinwort in New York.

"The news has been unremittingly bad for the last week or so, so people were primed for something worse than what we actually got."

The ISM report contained a rare bit of good news on the inflation front, with its prices paid index easing a touch to 75.5 in February from 76.0 in January. January's prices paid was the highest since July 2006.

However, there was plenty of bad news in the release. The new orders gauge slipped to 49.1 in February from 49.5 in January. The measure of employment slid to 46.0 from January's 47.1.

The export index of the ISM report also edged down but still showed growth in the sector, coming in at 56.0 in February versus 58.5 in January. Weakness in the dollar -- which has been hitting record lows against the euro recently and three-year lows against the yen -- has helped support exports.

However, this is only likely to cushion the downside rather than ignite new growth.

"The weak dollar is a bright spot for manufacturers. Inventories appear to be fairly lean at this point and that would definitely help manufacturers going forward," said Norbert Ore, chair of the ISM manufacturing business survey committee in Atlanta, Georgia.

"But I don't see any drivers pushing us to the upside coming up."

January's decline in construction spending to a $1.121 trillion seasonally adjusted annual rate was the sharpest since a 3.6 percent deceleration in January 1994 and marked the fourth straight monthly drop.

Analysts polled by Reuters before the report were expecting construction spending to fall 0.7 percent. December spending was revised lower to a 1.3 percent decline from the 1.1 percent drop previously reported.

According to another report, help-wanted postings on major U.S.-based Internet job boards rose 16.8 percent in February, showing an expected post-holiday seasonal rise.

The Conference Board said its measure of the total number of unduplicated online jobs rose to nearly 3.93 million in February from about 3.36 million in January.

However the figure in February this year was only 2.7 percent above the 3.82 million jobs posted a year earlier, posting the smallest year-on-year increase since the series began in May 2005.

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