Construction and Industrial Markets Still Lagging, But Residential Still Solid

The latest batch of economic reports didn't offer encouragement for the short-term prospects of the commercial or industrial markets, unlike the still-thriving housing market.

Construction spending dropped by 0.4 percent in August, led by cutbacks in private builders' projects including offices, industrial complexes and hotels. Spending on all construction projects around the country fell to a seasonally adjusted annual rate of $829.8 billion in August. The decline reported by the Commerce Department on Oct. 1 followed a tiny 0.1 percent decrease in July.

In the construction market, the commercial side continues to be the source of weakness, reflecting reluctance by businesses to make big commitments in capital spending, including new factories and other buildings, given economic uncertainties, including a possible war with Iraq, economists said.

“Uncertainty tends to be the enemy of investment,” said economist Clifford Waldman, president of Waldman Associates. “You would have to be very sure of yourself to build a commercial building these days.”

After seeing the Purchasing Managers' Index slip in September to 49.5, Jerry Jasinowski, president of the National Association of Manufacturers (NAM), Washington D.C., said the manufacturing recovery is “still treading water.”

“After several months of hovering around 50 percent (where more than 50 indicates a growing manufacturing sector), the drop in the PMI to 49.5 shows that the manufacturing recovery is continuing sub par growth and will not likely accelerate to a satisfactory pace until early next year,” Jasinowski said. “On average, a PMI index in the 50 percent range is consistent with slow growth in manufacturing industrial production.”

Jasinowski was encouraged by two recent Commerce Department reports. Manufacturing new orders remained unchanged in August following an exceptionally strong 4.4 percent growth in July is a positive indicator of latent strength in manufacturing. Also, new orders for manufactured durable goods fell just 0.6 percent in August.

“Coming on the tail of an 8.6 percent surge in July — the fastest monthly increase on record — these numbers are a pleasant surprise and clearly show that business investment is beginning to gradually improve,” Jasinowski said.

Another Commerce Department report offered some good news on the sales of new homes, which climbed to a record seasonally adjusted annual rate of 996,000 in August — a 1.9 percent increase from July. That was a stronger performance than the drop of around 3.5 percent analysts were expecting.

Housing is one of the few bright spots in the economy. Low mortgage rates are enticing buyers. Rates on 30-year fixed-rate mortgages last week dropped to a new low of 5.99 percent.