Factory growth in US cools, real spending stagnant

Growth in US manufacturing unexpectedly cooled in February and consumer spending was flat in January for the third straight month after accounting for inflation, casting a pall over the economic outlook.

The Institute for Supply Management on Thursday said its index of national factory activity fell to 52.4 last month from 54.1 the month before. The reading was shy of expectations of 54.5.

US manufacturing has been a bright spot in the global economy but the ISM data gave a tentative sign that headwinds overseas could be catching up with American manufacturers.

“The ongoing global challenges are part of what we're seeing in the number today,” said Christopher Low, an economist at FTN Financial in New York.

While an improved jobs market — new jobless claims were near four-year lows last week — appears to be boosting US incomes, the commerce department said inflation and taxes gobbled up the gains in January.

“Things aren’t so rosy in the garden and the consumer is still facing significant headwinds here,” said Ray Attrill, head of currency strategy for North America BNP Paribas in New York.

US stocks pared gains after the ISM data, while government debt prices cut losses. The euro briefly extended losses against the dollar.

Consumer spending and a big gain in inventories propelled the economy to grow at a three per cent annual rate during the last three months of 2011 – its quickest pace in over a year.

Jobless claims hover near four-year lows
New US claims for unemployment benefits edged down last week, holding near four-year lows, according to a government report on Thursday that suggested the labour market was gaining momentum.

Initial claims for state unemployment benefits fell 2,000 to a seasonally adjusted 351,000, the labour department said. The prior week’s figure was revised up to 353,000 from the previously reported 351,000.

But a pickup in inflation — due to higher rents and gasoline prices — could be taking its toll on consumers. Spending rose 0.2 per cent in January, just below analysts expectations, and was flat after adjusting for inflation, as it was in December and November.

That could weigh on the economic outlook because household purchases of everything from televisions to restaurant meals are major drivers of growth. Also weighing on the outlook, data from Tuesday showed a surprising large plunge in orders for durable US factory goods, which are items made to be long-lasting.

“Consumer spending is off to a pretty weak start in the first quarter,” said Keith Hembre, an economist at Nuveen Asset Management in Minneapolis. “That along with the most recent durables goods is painting a pretty weak picture for first quarter GDP despite the strong jobs numbers.”