Manufacturing weak, prices up

U.S. factory activity contracted again in March while prices paid by manufacturers rose to their highest levels in more than two years, data showed, suggesting higher inflation in a stagnating economy.

A separate report showed construction spending in February fell for a fifth month as the nation’s housing industry remained mired in a historic downturn.

The bad news on manufacturing came from the Institute for Supply Management, whose index of national factory activity edged up to 48.6 in March from 48.3 in February but remained below the level of 50 that separates growth from contraction.

“It is showing that activity has certainly slowed, but it is not as dire a report as it possibly could have been,” said Georges Yared, chief investment strategist at Yared Investment Research in Wayzata, Minn. “The end of the world is not here.”

An indication of worsening inflation came from the ISM’s prices paid index, which jumped to 83.5 in March -- the highest since October 2005, when disruptions caused by Hurricane Katrina led gasoline prices to rise sharply.

The prices paid index was at 75.5 in February.

“The March ISM index confirms that manufacturing is in a recession that we believe started back in October 2007,” said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, an economic and public policy research group.

“The combination of declining business activity and rising prices brings back the unpleasant memories of yesteryear’s stagflation.”

It was the third time in four months the gauge has shown contraction.

In a sign that the manufacturing sector’s fortunes may be worsening, the new orders index slipped to 46.5 in March -- the weakest reading since October 2001, when the economy was still mired in recession -- from 49.1 in February.

Meanwhile, the report on construction spending showed the worst housing downturn in a generation was spreading its fallout. U.S. construction spending fell 0.3% in February, hitting the lowest annual rate since mid-2005, the Commerce Department said.

Private home building fell to a $456.9-billion rate in February, the lowest since May 2003. The sector has fallen 24 consecutive months since it reached a peak two years ago.