Reports Offer Positive Economic News
By John M. Berry
Washington Post Staff Writer
Tuesday, April 3, 2001; Page E01
Manufacturing activity is declining at a slower rate, while construction spending continues to rise, according to two reports released yesterday that provided positive signs for the nation's troubled economy.
The nation's factories cut back on both production and employment in March, for the eighth consecutive month, but manufacturing activity declined more slowly last month than in January and February, according to the National Association of Purchasing Management.
The NAPM's index covering factory activity rose to 43.1 last month from 41.9 in February and an even lower 41.2 in January. A reading below 50 means the sector is contracting; above 50 means it is expanding. Historically, an index level of 42 has been consistent with zero growth in the overall economy.
Nevertheless, every component of the index -- new orders, production, employment, delivery times and inventories, rose compared with the two previous months. In other words, shrinkage of this key piece of the economy continued, but at a slower rate than before.
Meanwhile, construction spending rose in February for the fourth month in a row, according to a stronger than expected Commerce Department report. The value of private and public construction rose 0.6 percent in February after a very strong increase of 2.2 percent in January. The January number was revised upward from the originally reported 1.5 percent.
The two strong months suggest that inflation-adjusted construction spending will be up more than an 8 percent annual rate in the first three months of the year, which will be an important plus for the quarter's economic growth rate, analysts said.
Pluses from consumer spending and construction will be needed to offset declines elsewhere, such as in business investment in equipment and inventories, to avoid a contraction in the overall economy. Many forecasters now expect the first quarter's growth to roughly match the 1 percent pace of the fourth quarter of last year.
"The slower rate of decline in manufacturing is encouraging, but is still consistent with near-zero gross domestic product growth," said economist Charles Lieberman of Advisors Financial Center.
But Lieberman believes that a large share of the manufacturing sector's woes can be traced to the auto industry, which cut production and employment sharply in the final months of 2000 when sales turned sour and the number of unsold vehicles on dealers' lots increased alarmingly. Sales have risen this year and, combined with the production cuts, have allowed the industry to move a lot of unsold cars and light trucks.
"The auto industry remains a crucial sector within the economy, despite the attention lavished on dot-com and technology companies," Lieberman said. "Its remarkably quick inventory adjustment should lead to much more positive economic data for the second quarter. While more interest rate reductions are to be expected from the Federal Reserve, the economic news should turn more positive quite soon."
Lieberman noted that automakers are recalling workers and again plan to increase production. "The tide appears to be turning, led by the manufacturing sector and the auto industry that have been so depressingly weak for the past few months," he said.
Other analysts are less sanguine about the outlook, cautioning that even though consumer confidence stabilized last month, the confidence indexes of the University of Michigan and the Conference Board remain well below the levels of last summer, and the indexes could resume falling if a new wave of layoffs caused consumers to become more fearful for their jobs. If that happens, consumers might cut spending and force additional cuts in factory production.
"If consumer spending falls as much as the confidence data imply, there will be a new round of inventory building and the NAPM index will fall back again," warned Ian Shepherdson, chief U.S. economist for High Frequency Economics in Valhalla, N.Y.
Many analysts and policymakers are waiting with great interest for the March figures on employment and unemployment, which will be released Friday by the Labor Department, for further evidence on how the economy performed last month. Some are predicting either a very small gain in payroll jobs or perhaps a decline, but others are more optimistic.
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