Factory activity declines, inflation slows in August

U.S. manufacturing activity slipped in August and construction spending dropped to the lowest level in seven years in July as consumer spending and housing show no signs of reviving.

The Institute for Supply Management said Tuesday that its reading for the nation’s manufacturers fell to 49.9 from 50 in July. The August number matched economists’ prediction, according to the consensus estimate of Wall Street economists surveyed by Thomson Reuters.

A reading below 50 signals contraction. The index has hovered near the 50 “boom-bust” line all year.

The group’s inflation index hit a six-month low, however. For the first time in months, there were many items on the list of commodity costs coming down, as prices for copper, corn, fuel oil, natural gas and soybean oil fell.

Although the August inflation reading was at 77, it backed off further from its June high of 91.5, the highest since 1979.

New orders, the backlog of orders, inventories and employment declined in the sector as high gasoline prices and worries about the job market kept consumers cautious about spending. Exports expanded, however, helping to prop up the nation’s paper makers, computer producers and chemical and steel companies, among others.

“We’re seeing companies being cautious about their second-half plans,” said Paul McCarthy, strategy leader for U.S. industrial manufacturing transactions at PricewaterhouseCoopers. “They’re focusing on the core, what will be sustainable here in the U.S.”

Some economists read the report as an indicator that the economy would weaken in the second half of the year.

“With the global economy slowing and the rebate boost fading, we look for a mild sagging trend to unfold in the second half of the year,” said Sherry Cooper, chief economist at BMO Capital Markets.

The Commerce Department said construction spending declined 0.6% in July, double the 0.3% decrease analysts had been expecting.

Housing activity fell for a 16th consecutive month, declining 2.3% to a seasonally adjusted annual rate of $357.8 billion. That was the lowest level since March 2001, the start of the last recession.

Nonresidential activity, which had been offsetting some of the weakness in the residential sector, also fell in July, dropping 0.7% to an annual rate of $416.8 billion. It was the first setback in that category since December.