- The Washington Times - Monday, July 3, 2006

NEW YORK (AP) — The nation’s manufacturing sector expanded at a slower rate than expected in June and construction spending plunged in May, reinforcing the view that a moderating economy will prompt the Federal Reserve to pause at last in its credit-tightening regime.

The Institute for Supply Management said yesterday that its manufacturing index registered 53.8 in June, slightly below the 54.4 reading in May. It was the lowest reading since August.

Analysts had forecast a June index of 55 to 56.

A reading of 50 or more indicates expansion, while below 50 indicates contraction. The May figure represented the 37th consecutive month of growth.

In Washington, meanwhile, the Commerce Department reported that building activity dropped 0.4 percent in May to a seasonally adjusted annual rate of $1.206 trillion after a 0.2 percent decline in April. It marked the first time in more than three years that construction spending had fallen for two consecutive months. May represented the biggest one-month decline since a 0.7 percent fall in September 2004.

The softness in construction is just one of several signals of slowdown that the economy was sending in the spring under the impact of rising gasoline prices, higher interest rates and a cooling housing market.

Analysts said it could get the Fed to think twice before raising the federal funds rate again.

Bear Stearns economist John Ryding wrote, “If other June data also paint a picture of moderation … the Fed may want to pause to see whether the slowdown is temporary or not.”

He added: “However, inflation readings remain elevated and we still see the Fed raising the funds rate to 5.5 percent at some point in the third quarter.”

Norbert J. Ore, chairman of the ISM’s survey committee, said that although manufacturing showed slower growth last month, “renewed strength in June’s new orders index provides encouragement for the third quarter.” The manufacturing sector, he added, was “benefiting from the weaker dollar and business investment.”

The ISM’s New Orders Index registered 57.9 in June, up from 53.7 in May, while the backlog of orders went to 54 in June from 53 a month earlier.

Thomas J. Duesterberg, president and chief executive officer of the Manufacturers Alliance-MAPI in Arlington, said June’s reading was “consistent with a slowdown in manufacturing this year.” But he emphasized he expected no recession.

The ISM Employment Index slipped into negative territory at 48.7 in June compared with 52.9 in May, as did inventories, which fell to 46.9 in June from 48 the previous month. The ISM Price Index also eased to 76.5 last month from 77 in May.

“While energy and raw material prices are still a concern, our members indicate that they are coping with the challenges and generally see their businesses in a continuing growth mode,” Mr. Ore said.

The ISM report said 14 industries reported growth in June: petroleum, tobacco, instruments and photographic equipment, furniture, chemicals, wood and wood products, paper, primary metals, industrial and commercial computers, fabricated metals, food, transport and equipment, electronic components and equipment, and the miscellaneous category.

In the construction sector, housing demand has been dropping as mortgage interest rates rise. This is likely to be offset in part by strength in nonresidential building and government building projects, analysts said.

Ken Simonson, chief economist for the Associated General Contractors of America, noted that private nonresidential construction was down in May from April but still well-ahead of the May 2005 level.

“Private nonresidential construction appears to have plenty of momentum for the rest of 2006 and into 2007,” he said. “A variety of manufacturing, energy and power, hospital and retail projects will lead the way. Office construction is picking up in some markets.”

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