WASHINGTON -- Manufacturing declined for the third straight month in August, according to a report released yesterday, but analysts said they expect the sector to start improving ever so slightly in the coming months.
The National Association of Purchasing Management reported that its purchasing managers' index slipped to 49.3% in August from 49.5% in July. This was the third sub-50% score in a row and the fourth out of the last five months, the association said.
A reading below 50% indicates the manufacturing sector is contracting, according to the association. Economists on average had expected the index to drift back up to 50% in August, implying that the sector is essentially stuck in the mud. The association surveys 300 manufacturers monthly.
"The manufacturing sector isn't going to get weaker," said Jeffrey Given, an economist with Genetski & Associates Inc. in Chicago. "We probably have seen the bottom as far as the manufacturing sector is concerned."
Nancy Kimelman. chief economist of Technical Data, said it is impossible to predict where the manufacturing sector will go from here. But her feeling is that the sector will show "moderate improvement" in the second half of the year.
However, manufacturers are unlikely to hire many new workers if they increase production, Kimelman said. Unfilled orders for durable goods have been trending downward for many months, she said. By historical standards, she said, the manufacturing sector should actually be leaner in terms of jobs than it is now.
Kimelman predicted that at best the August employment report on Friday will show no change in manufacturing employment, following several months of decline.
Defense downsizing by the federal government is also adding to weakness in the manufacturing sector, said Veronika White, an economist with First Fidelity Bancorp. Unfortunately, she said, this is likely to continue for several years.
"On balance, the manufacturing sector probably isn't declining." White said. "I would characterize it as stagnant." She, too, expects the sector to improve in the coming months, predicting the purchasing managers' index will drift up into the 51% to 52% range by the end of the year.
The Commerce Department also reported yesterday that personal spending gained 0.4% in July and personal income fell 0.2%. Analysts generally had expected both indicators to increase about 0.3%. Spending advanced 0.7% in June and income fell 0.1%, according to revised department data.
Personal spending generally accounts for roughly two-thirds of total gross domestic product. Economists said the 0.4% gain in July is in line with the modest growth that is expected in the third quarter.
The back-to-back declines in personal income in June and July were the first time that income fell two months in a row since 1954, a department official said. He noted, however, that these numbers are not adjusted for inflation, which explains why they rarely decline for more than a single month at a time.
The department also said that the Midwest flood and the Southeast drought accounted for the July drop in personal income.
In a written statement, Commerce Secretary Ronald Brown said personal income would have risen 0.5% in July had it not been for the flood and drought, which depressed farm income.
That would have been the biggest gain in income since April, according to department data.
Private economists also dismissed the July drop in income as a one-time event. Disaster effects could also show up in August data, they said, but it would not change their outlooks. Most analysts expect slightly better growth in the second half of the year.
Analysts did cite a few bright spots on the income side. Private wages and salaries increased $18.3 billion in July, compared to a $9.4 billion decline in June, according to the department. Also, personal interest income increased slightly in July, following a small decline in June.
Yesterday, the Commerce Department also reported that construction spending declined 0.5% in July to $458.2 billion, following a 1.8% increase in June.
July's slim decline resulted from a 1.5% drop in total private construction that was partially offset by a 2% gain in public construction. Residential building advanced 0.3% in July, while non-residential building fell 5.6%.