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US manufacturing sector slows as construction spending hits record high

US manufacturing sector slows as construction spending hits record high

A US factory. (File photo: AFP/Robyn Beck)

WASHINGTON: US factory manufacturing activity slowed in February as new orders contracted, reflecting worries about supply chain disruptions related to the fast-spreading coronavirus outbreak, which has revived financial market fears of a recession.

While other data on Monday (Mar 2) showed construction spending increased by the most in nearly two years, hitting a record high in January, the upbeat news was likely to be overshadowed by the coronavirus epidemic.

US stock indexes suffered their worst week since the 2008 global financial crisis last week as investors sold equities and bought US Treasuries, and the yield on the two-year Treasury note fell below one per cent for the first time since 2016.

Federal Reserve Chair Jerome Powell on Friday described the economy's fundamentals as "strong," but acknowledged that "the coronavirus poses evolving risks to economic activity," and said the US central bank would "use our tools and act as appropriate to support the economy."

The Institute for Supply Management (ISM) said its index of national factory activity fell to a reading of 50.1 last month from 50.9 in January. Economists polled by Reuters had forecast the index would slip to 50.5 in February.

A reading above 50 indicates expansion in the manufacturing sector, which accounts for 11 per cent of the US economy. The ISM index pulled above the 50 threshold in January for the first time in five months, as trade tensions between the United States and China eased following the signing of a partial deal that month.

But the coronavirus epidemic, which has killed at least 3,000 people and infected more than 80,000, most of them in China, is a new threat for factories. Data and some regional Fed factory surveys had hinted at some stabilisation in manufacturing after it slumped last year.

READ: Hubei, epicentre of China's COVID-19 outbreak, reports sharp drop in new cases

The ISM said "comments from the panel were generally positive, with sentiment cautious compared to January," but also noted that "global supply chains are impacting most, if not all, of the manufacturing industry sectors."

About six industries, including computers and electronics, fabricated metal and chemical producers, reported the coronavirus outbreak was impacting their businesses.

Reports from around the world on Monday also showed factories taking a beating from the coronavirus outbreak, with activity in China shrinking at a record pace. Japan's PMI showed its factory activity was hit by the sharpest contraction in nearly four years in February.

In South Korea, factory activity also shrank faster in February. Activity in Vietnam and Taiwan, two key economies in the global technology supply chain, slipped into contraction from growth the month earlier.

In addition to fracturing the supply chain and undercutting exports, the outbreak has led to a slowdown in travel plans that is also seen hampering the services industry.

Apple last month warned investors it was unlikely to meet revenue targets for the first quarter of 2020 and that global iPhone supplies would be limited as manufacturing sites in China were not ramping up production as quickly as expected.

Financial markets are worried the coronavirus could derail the longest US economic expansion on record, now in its 11th year.

The ISM's forward-looking new orders sub-index dropped to a reading of 49.8 in February from 52.0 in January. A measure of exports orders fell last month after accelerating to its highest level since September 2018 in January.

Manufacturers also reported paying less for raw materials and other inputs. The ISM's factory employment index fell to 46.9 last month from 46.6 in January, suggesting manufacturing payrolls could remain weak after declining in December and January.

A separate report on Monday from the data firm IHS Markit showed its final US Manufacturing Purchasing Managers' Index slid to 50.7 in February from 51.9 in January.

The pullback in the ISM's closely watched national index and the IHS Markit PMI bucked a series of fairly upbeat readings on the manufacturing sector at the regional level. A purchasing manager survey tracking the Chicago region rose to a six-month high in February. 

There was a rebound in factory activity in the district that covers Texas. Manufacturing activity in areas watched by the Philadelphia Fed and New York Fed also picked up.

US stock indexes held gains after the release of the data, as investors' focus turned to assurances of central bank stimulus to counter the economic fallout from the coronavirus outbreak. Prices of US Treasuries were trading higher while the dollar was weaker against a basket of currencies.

STRONG CONSTRUCTION OUTLAYS

A third report on Monday from the Commerce Department showed construction spending surged 1.8 per cent to a record high of US$1.369 trillion as investment in both private and public projects increased. Data for December was revised up to show construction outlays rising 0.2 per cent instead of decreasing 0.2 per cent as previously reported.

Economists had forecast construction spending would increase 0.6 per cent in January. Construction spending advanced 6.8 per cent on a year-on-year basis in January.

In January, spending on private construction projects jumped 1.5 per cent to the highest level since February 2018, after gaining 0.1 per cent in December. It was boosted by a 2.1 per cent surge in spending on homebuilding after a 1.5 per cent increase in December.

Residential construction is being supported by lower mortgage rates. Residential investment increased solidly in the second half of 2019, after contracting for six straight quarters, the longest such stretch since the last recession.

Spending on nonresidential structures, which includes manufacturing plant and mining exploration, shafts and wells, increased 0.8 per cent in January. Spending on nonresidential structures fell 1.5 per cent in December. 

The government in its fourth-quarter GDP report last week said spending on nonresidential structures contracted in 2019 by the most since 2016. Outlays on private nonresidential structures have been depressed by a manufacturing downturn due to trade tensions and cheaper energy products.

Investment in public construction projects increased 2.6 per cent in January after gaining 0.6 per cent in December. Spending on state and local government construction projects surged 2.0 per cent after rising 0.5 per cent in December. 

Outlays on federal government construction projects soared 9.9 per cent in January to the highest level since May 2012. That followed a 1.5 per cent increase in December.

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Source: Reuters/de

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