Manufacturing contraction slows

UPDATED:

Economic activity in the U.S. manufacturing sector declined for the 18th month in a row in July, but the rate of contraction slowed considerably as indexes for new orders and production increased, according to a private-sector report released Monday morning.

Construction spending unexpectedly increased in June, the Commerce Department reported separately Monday, as the residential real estate sector showed improvement and construction projects funded by the $787 billion economic stimulus package increased as well.

The Institute for Supply Management (ISM) reported that its comprehensive manufacturing index increased to its highest level since last August, signaling that the manufacturing sector could soon reach a bottom and begin expanding.

The factory gauge hit an 11-month high of 48.9 last month. Index readings above 50 indicate expansion, while numbers below 50 represent contraction. The index hit its lowest level of 32.9 in December.

“Overall, it would be difficult to convince many manufacturers that we are on the brink of recovery, but the data suggests that we will see growth in the third quarter if the trend continues,” said Norbert J. Ore, chairman of the ISM’s Manufacturing Business Survey Committee.

Mr. Ore also noted that the New Export Orders Index showed growth following nine consecutive months of decline. That movement “suggests that the global economy is recovering,” he said.

The New Orders Index jumped to 55.3 in July, its highest level since July 2007.

“This suggests gains in production ahead and an economic recovery in the third quarter,” said John Silvia, chief economist for Wells Fargo Securities.

The Commerce Department reported Friday that the gross domestic product (GDP) declined by a moderate 1 percent annual rate in the second quarter after plunging 6.4 percent during the January-March period and 5.4 percent in the fourth quarter of 2008. Wells Fargo expects GDP to rise solidly in the third quarter, as manufacturers and retailers rebuild inventories, which sharply contracted last quarter.

The longest and deepest postwar recession has been especially cruel to manufacturing, which accounts for about 12 percent of GDP. The Federal Reserve reported last month that manufacturing output in June was 17.5 percent below its level in December 2007, when the recession began.

Manufacturing output in June was 0.5 percent below its June 1998 level. More than 35 percent of manufacturing capacity lay idle in June, the Fed reported.

The manufacturing industry has lost nearly 2 million jobs during the recession, which has caused total employment to fall by 6.5 million, according to Labor Department data.

The construction industry, which has lost 1.3 million jobs during the recession, has also been hit very hard. But it may have recently hit bottom.

Total construction spending increased 0.3 percent in June following a decline of 0.8 percent in May, the Commerce Department report revealed. Total construction spending in June was more than 10 percent below its year-earlier level.