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U.S. manufacturing contracted in February

/ Source: The Associated Press

U.S. manufacturing activity declined in February to its weakest level in nearly five years, an industry group survey showed Monday, heralding more instability in the job market and frailty in the overall economy.

After reporting modest growth for January, the Institute for Supply Management said its February manufacturing index registered at 48.3 _ its weakest reading since April 2003, but above Wall Street's even poorer expectations.

A reading above 50 indicates expansion, and anything below that shows contraction. The February figure was a bit better than the median forecast of 48.1 of economists polled by Thomson Financial/IFR. But it was slightly worse than December's reading of 48.4.

Manufacturers have been struggling with the rising cost of raw materials and languid demand in the housing market. Industries reporting declining activity last month included furniture, textiles, machinery and chemical products; those reporting growth included apparel, leather, wood, plastics and rubber, and food and beverage.

It's too soon to determine whether economic reports prove that the nation's economy is headed for, or already in, a recession. Recession is normally defined by two straight quarters of declines in gross domestic output. But recession or not, Monday's manufacturing data supported the argument that the economy is indeed on the wane.

"You can't paint a happy face on this data," said Wachovia Corp. economist Mark Vitner. "The economy may not be in recession, but it's not that far off."

The report's employment index fell to 46.0 from 47.1 in January, indicating accelerating contraction _ an inauspicious piece of news ahead of Friday's employment report for February from the Labor Department. On average, economists are forecasting a slight increase in payrolls, but some predict they will decline for a second straight month. January's net jobs loss was the first in almost four years.

And meanwhile, production stalled sharply _ the production index fell to 50.7 in February from 55.2 in January.

Other worrisome categories were new orders, which also showed an accelerated contraction, and prices, which continued to increase, albeit at a slower pace than in January.

The big reason manufacturing is not dropping off more severely is exports, said Norbert Ore, chairman of ISM's manufacturing business survey committee.

"It appears right now that manufacturing is weathering the storm better than other parts of the economy, particularly the financial sector," Ore said. The ISM's survey of February's service sector will be released Wednesday _ the group's most recent report showed the service economy contracting sharply in January.

Ore said eight of the 18 industries that the ISM manufacturing survey follows are closely tied to the export markets. Exports are holding up well due to the weak dollar, which makes U.S. goods attractive to foreign buyers.

The ISM's manufacturing index was released at the same time the Commerce Department reported that construction spending fell by 1.7 percent in January, its widest drop in 14 years. The two reports bolsters the argument for the Federal Reserve, which has already lowered key interest rates by more than 2 percent since last summer, to reduce rates again. Rate cuts tend to spur economic growth.