U.S. factory activity slips; construction spending hits one-year low

Mon Aug 1, 2016 1:22pm EDT
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By Lucia Mutikani

WASHINGTON (Reuters) - U.S. manufacturing activity eased in July amid shrinking order backlogs and declining employment, while an unexpected drop in construction spending in June suggested second-quarter economic was probably even weaker than reported last week.

The Institute for Supply Management's (ISM) report on Monday also showed manufacturers ramping up production to an 18-month high even as factories continued to draw down inventories, which some economists said pointed to moderate growth in the sector.

Tim Quinlan, a senior economist at Wells Fargo Securities in Charlotte, North Carolina, said it was counterintuitive for manufacturers to step up production while cutting payrolls and running down inventories, given that production is a coincident indicator for the economy.

"Perhaps the inventory drawdown has left stockrooms too spare, resulting in production increases as orders pick up," Quinlan said. "These crosscurrents are explained somewhat by the fact that we are late in the economic cycle and businesses are understandably cautious with all the various risk factors."

ISM said its index of national factory activity slipped 0.6 percentage point to a reading of 52.6 last month. A reading above 50 indicates an expansion in manufacturing, which accounts for about 12 percent of the U.S. economy. The index has now increased for five straight months.

Manufacturers reported a moderate slowdown in new orders as well as export order growth. Order backlogs contracted as did factory employment and inventories, though the pace of destocking slowed. Manufacturers also reported that their customers continued to view inventories as too high.

An outright drop in business inventories weighed on economic growth in the second quarter, with gross domestic product rising at a tepid 1.2 percent annualized rate after increasing at a 0.8 percent pace in the first quarter.

Manufacturing remains constrained by the lagging effects of the dollar's rally and an oil price plunge between June 2014 and December 2015, which have hurt exports and undercut business spending. With the dollar rising in recent months and oil prices slumping again, economists see little upside for manufacturing.   Continued...

An SUV moves through the assembly line at the General Motors Assembly Plant in Arlington, Texas June 9, 2015.  REUTERS/Mike Stone