New York, NY, Apr. 2--Manufacturing activity shrank in March for the first time in five months, suggesting that worries about a war in Iraq were holding the economy back. The progress of the war will determine, in large part, whether the economy recovers or retrenches, economists said.
“Clearly, going into the war, the economy was losing momentum,” said Lynn Reaser, chief economist at Banc of America Capital Management in St. Louis. “Businesses believed there was no reason to take a risk in investments with the onset of war at hand.”
The Institute for Supply Management's manufacturing index fell to 46.2 last month from 50.5 in February—a reading below 50 means business contracted. Analysts had expected war fears to cut into manufacturing, though not by that much, and had forecast a reading of 49.
The ISM, a private business group, wouldn't release the cutoff date of the March survey, making it difficult to gauge how much the start of the war on March 19 affected responses. But Norbert J. Ore, who oversees the survey, said the index reflects prewar worries more than attitudes about the actual conflict.
“I think we'll see some recovery of this for the month of April as people see more clearly what the turn of events will yield for them,” Ore said. “This was really built around the threat of what was going to happen.”
The manufacturing index provided further proof that the economy stalled in the first quarter of 2003, according to some economists. They expect gross domestic product will barely advance, compared with the fourth quarter of 2002.
“It won't be down, but it'll be another anemic GDP of around 1.4%,” said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. “It looks like this quarter will be very close to that. While that's still a positive number, it's well below any potential for the economy to grow.”
Economists and market watchers are awaiting Friday's release of the government's employment report. The consensus is for the unemployment rate to move up marginally to 5.9% for March from 5.8%, though some economists anticipate it will edge up to 6%.
If the economy shows signs of sliding into a new recession, many believe the Federal Reserve will be motivated to lower interest rates again—though with its key rate at a 41 year low of 1.25%, the Fed has little room to maneuver.
“If the war is over in a matter of weeks, rather than months, which seems to be the more likely case, the economy can still recover and show a rebound in the second half of the year,” said Reaser. “But as we enter the second quarter, confidence remains very fragile and businesses remain hesitant to embark on capital spending projects to help the economy get on a better footing.”
Dan Meckstroth, chief economist at Manufacturers Alliance, a business research group in Arlington, Virginia, said he believes the manufacturing sector is in a double dip recession, hurt by the severe cutback in business capital spending.
“Businesses are spending very cautiously for many reasons, the war being one,” Meckstroth said. “They have excess capacity. But the main reason is that production is not growing fast enough. We need businesses to begin buying goods because they're growing, not just replacing things because they're broken.”
The nation's manufacturers saw new orders in March drop sharply, with the ISM's new orders index at 46.2%--6.1% lower than February's reading. The ISM's production index fell 9.1% to 46.3%, indicating a decline in business. Employment in the manufacturing sector again failed to recover in March, coming in below the key 50 mark for the 30th consecutive month. The employment index came in at 42.1% last month.
Manufacturers continued to see higher prices cutting into their bottom line last month. The ISM's prices index was up for a 13th month, with higher costs in energy, gasoline, paper and chemicals.
