Manufacturing cools in U.S. as government cuts loom

Manufacturing grew less than forecast in March as orders and production cooled, highlighting the risk of a U.S. economic slowdown this quarter as federal budget cuts take effect.

The Institute for Supply Management’s factory index fell to 51.3 from an almost two-year high of 54.2 in February, the Tempe, Arizona-based group’s figures showed today. A reading of 50 is the dividing line between growth and contraction. Another report showed construction spending climbed in February, led by the strongest home-building outlays in more than four years.

The manufacturing report showed housing- and auto-related industries outpaced other areas last month, a sign consumer spending is bolstering the expansion, while exports grew at the fastest pace in almost a year. At the same time, a failure to reach compromise on ways to reduce the debt triggered $85 billion in across-the-board federal spending cuts on March 1, giving factories reason to take a guarded approach.

“The manufacturing outlook is positive, broadly, with a couple of cloudy areas,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, whose ISM forecast was the closest among those surveyed by Bloomberg. “It highlights the downside of reduced government spending but underscores a fairly stable private sector.”

Stocks fell as manufacturing slid, pulling the Standard & Poor’s 500 Index lower after reaching a record high last week. The S&P 500 dropped 0.5 percent to 1,562.17 at the close in New York.

Asian Manufacturers

Elsewhere today, confidence among big Japanese manufacturers in March improved less than economists estimated as companies said they’ll cut investment by the most since the global recession. In China, manufacturing expanded at a faster pace last month, indicating the world’s second-largest economy is stabilizing.

Another U.S. report today highlighted the risk from the budget reductions. Spending on construction projects rose 1.2 percent in February, paced by the highest level of homebuilding in more than four years, according to figures from the Commerce Department. The data also showed federal outlays were the only weak spot, falling in February for a second consecutive month.

“The upturn in housing starts is translating to a greater increase in outright expenditures, which is adding to GDP growth,” said Michelle Meyer, senior U.S. economist at Bank of America Corp. in New York, who correctly projected the gain in construction spending. “You’re still seeing a slightly upward trend. The increase was driven by single-family construction.”

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