Manufacturing shrinks in August, construction down

Slow consumer spending and high gas prices have stalled manufacturing, and even some bright spots are expected to dim. Exports, which have propped up the sector, may slide as economies overseas slow. Meanwhile, construction spending is at a seven-year low that has spread from housing to nonresidential projects.

The Institute for Supply Management said Tuesday its reading for the nation's manufacturers fell to 49.9 in August from 50 in July, matching economists' expectations, according to Thomson/IFR. A reading below 50 signals contraction, while a reading above 50 signals growth.

The index has hovered near the 50 "boom-bust" line all year and industry groups say they expect similarly weak growth for the remainder of the year.

"With the global economy slowing and the rebate boost fading, we look for a mild sagging trend to unfold in the second half of the year," said Sherry Cooper, chief economist at BMO Capital Markets.

The second half of 2008 has started especially slowly for certain sectors. U.S. auto sales hit a 16-year low in July, and food manufacturers continue to struggle with inflation. Hormel Foods last month lowered its fiscal-year outlook and Smithfield Foods Inc., the nation's largest pork producer, swung to a first-quarter loss of $12.6 million, from a profit of $54.6 million last year.

"From an economic standpoint, we'll be chugging along, but not at any great rate here for a little while," said Patrick Kiely, president of the Indiana Manufacturers Association.

On the positive side, inflation appears to be slowing, although it remains elevated. The Institute for Supply Management's inflation index hit a six-month low and for the first time in months, there was more than one commodity coming down in price. Prices fell for copper, corn, fuel oil, natural gas and soybean oil, according to the survey.

The inflation reading for August was 77, down from June's 91.5, which was the highest since 1979.

Still, many manufacturers are still struggling to push through price increases that reflect the higher costs for everything from electricity to copper over the last year, said Paul McCarthy, strategy leader for U.S. industrial manufacturing transactions at PricewaterhouseCoopers. Some manufacturers that have been able to raise their prices are seeing little to no profit from the increases.