Spending Cuts Weigh on Manufacturing

Data so far had shown little sign that higher taxes and the $85 billion in across-the-board government spending cuts that took effect March 1, known as the sequester, had weighed on economic activity.

“It suggests the economy was probably starting to slow at the end of the quarter, possibly reflecting the impact of the fiscal headwinds coming from sequestration and higher taxes,” said Millan Mulraine, a senior economist at TD Securities.

The Institute for Supply Management said on Monday that its index of national factory activity fell to 51.3 last month from 54.2 in February. A reading above 50 indicates expansion in the manufacturing sector. New orders, an indicator of future growth, accounted for much of the drop in the index.

The I.S.M. report was at odds with a separate report showing that factories gained steam in March on strong order growth, closing out the best quarter for the sector in two years.

The financial data firm Markit said its manufacturing purchasing managers index rose to 54.6 last month from 54.3 in February. A reading above 50 indicates expansion.

“We are beginning to see where the government spending cuts will reduce demand,” said Joel L. Naroff, chief economist at Naroff Economic Advisors. “In those sectors and parts of the country that will feel the wrath of sequestration, adjustments are being made.”

Separately, the Commerce Department reported on Monday that construction spending advanced 1.2 percent in February. Spending declined 2.1 percent in January.

The construction report added to a series of other data that has suggested economic growth accelerated in the first quarter from the fourth quarter’s anemic 0.4 percent annual pace.

Data on employment, consumer spending, industrial production and housing have been relatively strong.

Some economists raised their growth estimates for the January-March period as a result of the construction report.

Macroeconomic Advisers lifted its forecast by one-tenth of a point to 3.6 percent. JPMorgan Chase raised its estimate from 2.7 percent to 3.8 percent. Part of the increase reflected strong consumer spending.

Construction spending in February was bolstered by a 1.3 percent rise in private construction projects. Spending on private residential projects increased 2.2 percent to the highest level since November 2008.

“Housing is catching fire,” said Ryan Sweet, a senior economist at Moody’s Analytics. “All the conditions are in place for further improvement with housing, even with lingering risks. Housing will keep the economy going forward even with the fiscal constraints.”

Article source: http://www.nytimes.com/2013/04/02/business/economy/us-manufacturing-slows.html?partner=rss&emc=rss