Manufacturing rebounding but construction spending slips unexpectedly

Monday, July 1st 2002, 12:00 am

By: News On 6

WASHINGTON (AP) _ The nation's manufacturers _ hardest hit by last year's recession _ regained more ground in June, while construction spending fell in May to its lowest level in five months.

The latest batch of economic data released Monday indicated that while the recovery is on track, improvements are uneven.

The Institute for Supply Management reported that its index of business activity rose for the fifth straight month to 56.2 percent in June from 55.7 percent in May. An index above 50 signifies growth in manufacturing, while a figure below 50 shows contraction.

Manufacturing's performance was stronger than the 55.5 reading many analysts were forecasting and is good news for the national economy and for an industry that throttled back production during the slump, resulting in a loss of hundreds of thousands of jobs.

In another report, the value of all construction projects dropped 0.7 percent in May to a seasonally adjusted annual rate of $852 billion, the lowest level since December, the Commerce Department reported.

The performance was weaker than the 0.3 percent increase analysts were expecting.

Much of the weakness in May came from a cut back in spending on commercial projects, such as office buildings and industrial complexes.

In April, overall construction spending rose 0.4 percent.

Stocks were mixed Monday. By late morning, the Dow Jones industrial average was up 6 points while the Nasdaq index was off 27 points.

``The strength in manufacturing might offset some of the weaker components of the economy like commercial construction and the possibility that the consumer sector might soften,'' said economist Richard Yamarone with Argus Research Corp.

Construction activity _ largely powered by the residential side _ remained solid throughout last year's recession and was one of the economy's few bright spots during the slump. Low interest rates have supported the market.

Citing uncertainties about the recovery's vitality, Fed policy-makers left short-term interest rates at 40-year lows last week, the fourth time this year they held rates steady.

With interest rates remaining low, consumers might be motivated to spend more and businesses to boost investment in new plants and equipment. Both are crucial to the recovery.

The Fed, in a survey of business conditions around the country released in June, said that the economy recovery was expanding at a modest pace but that improvements were spotty.

The recovery, economists said, faces some possible risks.

Americans' confidence in the economy, as measured by the Conference Board, fell in June to a four-month low, pulled down by accounting scandals and worries about jobs.

Economists worry that the stream of corporate accounting scandals could jolt confidence, making consumers less willing to spend and companies even more wary of making big commitments such as capital investments and hiring.

In May, spending on commercial buildings, such as offices, industrial complexes and hotels and motels, declined by 3.1 percent to a seasonally adjusted annual rate of $173 billion. Spending on commercial projects rose a tiny 0.1 percent in April, according to revised figures.

But that was much weaker than the 1.6 percent gain reported a month ago. At that time, the advance had raised hopes among some economists that this segment of the market _ which has been turning in lackluster performances _ might be getting ready to turn a corner.

Spending on residential construction declined by 0.8 percent in May to a rate of $412.3 billion. However, the weakness largely reflected a pullback in spending on home improvements. Spending on new single-family homes was unchanged at a rate of $260.7 billion and spending on new apartments, condos and other multifamily housing was flat at a rate of $36.2 billion.

Spending on big government projects, including schools and military facilities, rose 1.9 percent in May to a rate of $203.9 billion.