Manufacturing index declines in August

WASHINGTON — A slowdown in manufacturing and construction means the economy needs to rely even more on exports to sustain growth.

Turmoil in the housing and financial markets appears to be spilling over to the broader economy, according to data released Tuesday that showed expansion in the manufacturing sector slowed in August and construction spending dropped sharply in July. Although exports remain a bright spot, analysts don’t expect overseas sales to accelerate enough to prevent U.S. economic growth from slowing in the second half of this year.

“The debate is over whether the economy will be soft, very soft or in recession,” said John Shin, a senior economist at Lehman Bros. who forecasts that growth will slow to a 2% annual rate in the third quarter, down from 4% in the second quarter.

The Institute for Supply Management, an organization of corporate purchasing executives based in Tempe, Ariz., said its manufacturing index registered 52.9 in August, down from 53.8 in July and slightly below the expectations of Wall Street economists. Readings above 50 indicate expansion.

The Commerce Department said construction spending dropped 0.4% in July compared with June, the weakest showing since January. It was a bigger drop than economists had expected and underscored the drag the housing slump was having on building activity.

Economists blame the expected weakness this year on a slowdown in consumer spending, resulting from declining home values and reduced credit availability.

Export growth continues to bolster the manufacturing sector, however, and will counteract some of the effect of the housing slowdown, economists said.

“I think it’s going to be a draw,” said Mark Zandi, chief economist for Moody’s Economy.com in West Chester, Pa., referring to the effect of exports and housing on the economy.

Zandi expects that exports will be even more important next year, as the effect of the housing slump declines and global economic growth continues to increase demand for U.S. goods overseas.

Manufacturers of aircraft, medical devices and agricultural and construction equipment will continue to benefit from a weak dollar, economists said, which makes U.S. goods less expensive abroad.

Boeing Co., for example, expects to deliver 515 to 520 planes next year, with about 70% going overseas, a spokesman said. That’s up from the 440 to 445 planes the company is on track to deliver this year.