Wednesday, April 2, 2003

Manufacturing, construction took prewar hit

The Associated Press

NEW YORK - Manufacturing activity pulled back in March for the first time in five months and construction spending dipped in February, according to reports released Tuesday, suggesting that worries about a war in Iraq were holding the economy back.

The progress of the war will determine, in large part, whether the economy recovers or retrenches, economists said.

"Clearly, going into the war, the economy was losing momentum," said Lynn Reaser, chief economist at Banc of America Capital Management in St. Louis. "Businesses believed there was no reason to take a risk in investments with the onset of war at hand."

An index that measures the health of the manufacturing industry fell in March and showed that new orders and production at factories dropped. The Institute for Supply Management's manufacturing index fell to 46.2 last month from 50.5 in February - a reading below 50 means business contracted.

Analysts had expected war fears to cut into manufacturing, though not by that much, and had forecast a reading of 49.

The ISM, a private business group, wouldn't release the cutoff date of the March survey, making it difficult to gauge how much the start of the war on March 19 affected responses. But Norbert J. Ore, who oversees the survey, said the index reflects prewar worries more than the actual conflict.

"I think we'll see some recovery of this for the month of April as people see more clearly what the turn of events will yield for them," Ore said. "This was really built around the threat of what was going to happen."

The Commerce Department reported construction spending declined by 0.2 percent in February, as the government cut back sharply on public works projects.

However, construction spending came in at a seasonally adjusted annual rate of $872.2 billion, a brisk level. Residential construction continues to be one of the economy's few bright spots, while the commercial side lags, with businesses reluctant to spend on new buildings amid uncertainty.

Both the manufacturing index and the construction spending report provided further proof that the economy stalled in the first quarter of 2003, some economists said. They expect gross domestic product - the best indicator of the economy's health - will barely advance, compared with the fourth quarter of 2002.

"It won't be down, but it'll be another anemic GDP of around 1.4 percent," said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. "It looks like this quarter will be very close to that. While that's still a positive number, it's well below any potential for the economy to grow."

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