Manufacturing, Construction Show Declines

Manufacturing activity contracted again in July, marking the 12th consecutive month of decline and affirming that the sector remains the economy’s weakest link, a private trade group said Wednesday.

The report, along with a government report saying construction spending fell for the fourth straight month in June, fueled optimism among some economists that the Federal Reserve Bank will trim interest rates again when it meets later this month.

The Tempe, Ariz.-based National Assn. of Purchasing Management announced that its index of business activity fell to 43.6 in July from 44.7 the previous month. Analysts had been expecting an index of 44.5; an index above 50 signifies growth in manufacturing, while a figure below 50 shows contraction.

“This report, among others, gives [Federal Reserve Chairman] Alan Greenspan the ammunition to justify support for further reductions in interest rates,” said Hugh A. Johnson, chief economist at First Albany Corp.

To prevent the economy from falling into recession, the central bank has slashed interest rates six times this year, totaling 2.75 percentage points.

The NAPM report is watched closely because it is one of the first indications of how the manufacturing sector performed in July. The figures are based on a survey of purchasing executives who buy the raw materials for manufacturing at more than 350 industrial companies.

Separately, the Commerce Department said Wednesday that spending for all building projects fell by 0.7% in June to a seasonally adjusted annual rate of $861.6 billion. For June, the overall decline in construction activity reflected weakness in both private sector work and government projects.

The latest string of weak economic news follows the government’s report last week that the overall economy was barely staying out of a recession in the April-June quarter with the gross domestic product rising at a rate of just 0.7%.

Norbert J. Ore, who oversees the NAPM report, said the survey indicates that the overall economy is continuing to grow, even though the manufacturing sector remains in recession and its rate of decline increased from June to July.

The Bush administration and many private economists believe the country is poised to stage a rebound in growth in the second half of this year, helped by the tax rebate checks now arriving in the mail and aggressive credit easing by the Federal Reserve.

However, Ore was not convinced about the prospects for an uptick in the manufacturing sector any time soon.

“The manufacturing sector . . . appears to continue to lack drivers that will stimulate recovery,” said Ore.

In July, manufacturers continued to back off from making major capital investments and were hurt by a decline in new orders and employment.

The markets closed mixed following the release of the reports, with the Dow Jones industrial average falling 12.80 points to 10,510.01 and the Nasdaq composite index rising 41.25 points to 2,068.38.

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Construction Spending

In billions of dollars, seasonally adjusted:

Source: Commerce Department

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Purchasing Managers Index

Source: National Assn. of Purchasing Management