Manufacturing Drop Is First in Seven Months : Economy: Purchasing managers’ index shows slowdown in production and new orders.

Hurt by a spending slowdown in the first three months of the year, the U.S. manufacturing sector shrank in April for the first time in seven months, according to a widely followed industrial survey released Monday.

At the same time, the government said an East Coast blizzard slowed construction spending in March, but improving incomes and historically low mortgage rates are expected to contribute to stronger home building in the spring and summer.

The National Assn. of Purchasing Management also said the overall economy grew in April, but at the lowest rate since September. Key sectors reported slowing growth, including business production and new orders by companies.

Economists said corporate America remains cautious about cranking up because of the slow economic recovery. Companies are especially wary about building up inventories, which can be costly.

“I think they’re more alert to that risk than they have been in prior cycles because this has not been a strong recovery,” said Richard Rippe, chief economist with Prudential Securities Inc. “It has been a weak recovery and there are still questions about its pace and longevity.”

Such concerns were reflected in the purchasing managers’ data. Inventories declined in April for the third straight month.

The group’s purchasing managers’ index, which rates the manufacturing economy, fell to 49.7% in April from 53.4% in March. That was the lowest level since 48.7% last September.

A rating below 50% generally indicates that the manufacturing economy is contracting. On the overall economy, a rating above 44.5% over an extended period generally indicates expansion.

The group said the index has averaged 54.2% in the first four months of 1993, better than the 52.7% reading for all of 1992.

The survey polls people responsible for buying supplies at a wide range of manufacturing businesses. It is regarded as a good forecast of future economic activity because the purchasers buy the raw materials that fuel the nation’s factories.

The National Assn. of Purchasing Management, based in Tempe, Ariz., polls more than 300 executives at leading industrial companies nationwide.

Economists said the weakness in the April data is consistent with a sharp drop in the overall economy’s first-quarter growth rate to 1.8% as measured by the Commerce Department. The increase in the gross domestic product, the sum of all goods and services produced in the United States, was less than half the fourth-quarter rate.

The purchasing managers said orders for new business, while continuing to grow in April, did so at a sharply lower pace than in recent months.

In its construction spending report, the Commerce Department said outlays for residential, non-residential and government building slipped 0.8% to a seasonally adjusted annual rate of $442.7 billion. It was the first drop since spending fell 1.4% last August.

“Expenditures on construction should rebound as the weather improves,” predicted Marilyn Schaja of Donaldson, Lufkin & Jenrette Securities Corp.

“If, as we believe, housing activity picks up during the spring and summer, residential construction outlays will be strong during the second half of the year,” agreed Bruce Steinberg of Merrill Lynch & Co.

But he added: “Non-residential construction will remain weak for the rest of the year. Public construction should pick up.”

Despite the harsh winter, spending during March was 5% above that of a year ago. And the Commerce Department said spending in both January and February, also slowed by winter storms, was better than first believed.

It revised the January figure to a 0.3% increase, rather than the 1.3% drop originally estimated, and said spending in February rose 1.2%, rather than the 0.1% reported last month.

Residential outlays slipped 0.2% in March, to a $204.5-billion rate, after edging up 0.1% a month earlier.

Spending on single-family houses also dropped 0.2%, to a $129.9-billion rate, after a 0.5% decline in February.

But analysts believe that the housing industry should improve because income growth is improving gradually and mortgage rates are at their lowest in nearly two decades. Thirty-year, fixed-rate mortgages averaged 7.5% in March and stood at 7.43% last Thursday.

Construction Spending

Billions of dollars, seasonally adjusted:

March, ‘93: 442.7

Feb., ‘93: 446.4

March, ‘92: 421.5

Source: Commerce Department

Purchasing Managers’ Index

The purchasing managers’ index tracks overall business activity at 300 industrial companies.

March, 1992: 54.8%

April, 1993: 49.7%

Source: National Assn. of Purchasing Management