Originally created 03/04/03

War jitters slow manufacturing growth, cut consumer spending

WASHINGTON -- Manufacturing barely grew and consumers cut spending amid worries about a possible war with Iraq, ominous signs for an already troubled economy.

The disappointing reports Monday highlighted the economy's struggles to get back on surer footing as businesses and consumers turn more cautious in the face of geopolitical uncertainties, a turbulent stock market and rising energy prices.

"The economy seems to be holding its head above water but is swimming very slowly," said Lynn Reaser, chief economist at Banc of America Capital Management.

The Institute for Supply Management's index of manufacturing activity fell to 50.5 in February, a marked deterioration from January's reading of 53.9. A level above 50 indicates the manufacturing sector is expanding; below 50 means it's contracting.

February's performance was significantly weaker than the 52.0 reading analysts were predicting.

Manufacturing - hardest hit by the 2001 recession - is the weakest link in the economy's ability to get back to full health. Companies are loath to make big financial commitments in capital spending and in hiring, a major force restraining the recovery.

While the bad winter weather that ravaged parts of the country may have played a role in the manufacturing slowdown, economists believed war worries were a bigger factor in the sector's weakness.

In a second report, the Commerce Department said consumers trimmed spending by 0.1 percent in January - the first such rollback in four months.

The cutback came after consumers splurged in December, boosting their spending by a sizable 1 percent. End-of-year financing deals on cars and other big-ticket goods proved too good to pass up.

In January, however, consumers slashed spending on such big-ticket items by the largest amount in 13 years.

Unlike businesses, consumers have been the primary force keeping the economy going.

Although economists are hopeful consumers will keep their pocketbooks and wallets sufficiently open to prevent the economy from tipping into a new recession, Monday's report raised new questions about consumers' appetites.

"Households are still buying, though don't expect them to continue to carry the load the way they had been," warned Joel Naroff of Naroff Economic Advisors.

Americans' incomes, including wages, interest and government benefits, went up for the sixth straight month in January, rising by a modest 0.3 percent.

A third report showed that the housing market continues to be one of the economy's few bright spots.

Construction spending jumped by 1.7 percent in January to a seasonally adjusted annual rate of $877.9 billion, an all-time monthly high, as builders bet that low mortgage rates would continue to support the housing market.

The increase - the largest in a year - followed a strong 1.5 percent advance in December.

Most of January's strength came from residential projects, where spending rose to a record monthly rate of $452.6 billion.

Consumers play a key role in shaping the economic recovery because their spending accounts for two-thirds of all economic activity.

If a war were to break out, economists believe consumers initially would sharply cut back on their spending, a force that would slow the recovery.

If the United States were to put a quick and successful end to the war, then consumers and businesses would probably return to more normal buying and investing behavior, helping economic growth. But if a war turns out to be drawn out and severe supply disruptions cause dramatic spikes in oil prices, the economy could be looking at a backslide into recession.

The Federal Reserve is expected to hold short-term interest rates at 41-year lows of 1.25 percent when it meets next on March 18. Fed policy-makers hope that low rates will encourage consumers and businesses to boost spending and investment, helping along the recovery.

In January, consumers cut spending on "durable" goods, such as cars, by 5.7 percent, the biggest drop since Feb. 1990, and a reversal from the brisk 6.8 percent rise registered in December.

Spending on nondurables, such as food and clothes, went up by 1.3 percent in January, following a 0.4 percent increase. Consumers boosted spending on services, including travel and utilities, by 0.4 percent, up from a tiny 0.1 percent advance in December.

On the Net:

Consumer and construction reports: http://www.commerce.gov/

Manufacturing: http://www.ism.ws


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