Factories in the United States grew more slowly in August, despite a spending boom in July that depleted Americans' savings for only the second time on record.
Disappointing those expecting stable expansion, the Institute for Supply Management's national manufacturing barometer retreated to 53.6 in August from 56.6 in July.
The destruction wrought by Hurricane Katrina on the American Gulf Coast this week could mean a further retreat in manufacturing ahead.
"There is a risk the index falls again next month," said Ian Morris, chief US economist at HSBC.
The retreat in factory activity was somewhat surprising, since it came on the heels of a 1 percent increase in personal consumption that took the US savings rate into negative territory.
In fact, consumers spent 0.6 percent more than they earned, the lowest savings rate since monthly records began in 1959, the Commerce Department said.
Analysts worry that with energy prices soaring and many fearing at least a softening of the housing market, this lack of savings could leave Americans without much of a buffer against any looming economic headwinds.
"What America has succeeded in creating is not an economy impervious to shocks, but merely one which enables their consequences to be postponed to a later date," said Peter Schiff, president of Euro Pacific Capital.
Not only did home sales appear to have reached a peak in mid-summer, but construction spending for July proved flat, confounding forecasts of a 0.5 percent gain.
Instead of housing, Americans appear to have directed their money toward car purchases, trying to take advantage of steep discounts offered by automakers.
They were able to do so in part because personal income advanced 0.3 percent after a 0.5 percent June increase, the Commerce Department said.
While higher gasoline costs were certainly presenting a burden for car owners, energy price increases apparently had yet to infiltrate other sectors of the economy.
The department's measure of consumer inflation advanced 0.3 percent, but the core PCE price index edged up just 0.1 percent, with the year-on-year increase slipping a notch to a 1.8 percent gain. Core data excludes both food and energy.
Financial markets reacted most acutely to the ISM factory data, with stocks taking a hit and bond prices rallying sharply.
"We're in the range between 50 and 55 where the Fed often holds interest rates steady, and with Hurricane Katrina likely impacting the economy, particularly in the South, in September, we may see the Fed hold policy steady for a while until policy-makers can assess the full impact of the hurricane," said Gary Thayer, chief economist at A.G. Edwards & Sons.
For one thing, Hurricane Katrina could put a serious dent in the revenues of US chain stores, which were already showing mixed results in August.
Target Corp's August sales grew a robust 6.3 percent and it predicted the impact of the hurricane to be less than 1 percentage point for September.
But Wal-Mart Stores Inc, the world's biggest retailer, posted sales at the low end of estimates and warned that Katrina may hamper September performance.
The hurricane's impact on the employment situation was also difficult to fathom at this point.
Data for last week, before Katrina hit landfall, showed first-time claims for jobless benefits climbed to 320,000 in the week ended August 27. That was their highest level in two months and up from a revised 317,000 the prior week.
A four-week moving average of claims, seen by many economists as a better guide to the employment situation because it irons out weekly volatility, rose for the third straight week, to 316,750 from 315,500 the previous week.
The Labour Department said it had to estimate jobless claims counts from Mississippi and Louisiana since officials were unable to contact offices in those hurricane-stricken states.
While last week's numbers showed no effects from the storm that slammed into the Gulf Coast on Monday, its aftermath will likely skew the data in the weeks ahead.
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