Growth in US manufacturing unexpectedly cooled in February and consumer spending was flat in January for the third straight month after accounting for inflation, casting a pall over the economic outlook. The Institute for Supply Management said on Thursday its index of national factory activity fell to 52.4 last month from 54.1 the month before. The reading was shy of expectations of 54.5.
US manufacturing has been a bright spot in the global economy but the ISM data gave a tentative sign that headwinds overseas could be catching up with American manufacturers. "The ongoing global challenges are part of what we're seeing in the number today," said Christopher Low, an economist at FTN Financial in New York.
While an improved jobs market - new jobless claims were near four-year lows last week - appears to be boosting US incomes, the Commerce Department said inflation and taxes gobbled up the gains in January. Consumer spending and a big gain in inventories propelled the economy to grow at a 3 percent annual rate during the last three months of 2011 - its quickest pace in over a year.
But a pickup in inflation - due to higher rents and gasoline prices - could be taking its toll on consumers. Spending rose 0.2 percent in January, just below analysts expectations, and was flat after adjusting for inflation, as it was in December and November. That could weigh on the economic outlook because household purchases of everything from televisions to restaurant meals are major drivers of growth. Also weighing on the outlook, data from Tuesday showed a surprising large plunge in orders for durable US factory goods, which are items made to be long-lasting.
After-tax income in January fell 0.1 percent when adjusting for prices. Prices on personal consumption expenditures rose 0.2 percent, up from 0.1 percent in December. Still, a Labour Department report showing a drop in new filings of jobless claims last week added to the view that next week's employment report could show companies are hiring at a brisk pace.
Indeed, early signs of spending in February are upbeat. The government will release February's employment report on March 9. While the labour market is gaining momentum, the level of employment is still 5.82 million from its prerecession level. On Wednesday, Federal Reserve Chairman Ben Bernanke described the labour market as "far from normal" and further improvement would require stronger growth in final demand and production.
The number of people still receiving benefits under regular state programs after an initial week of aid fell 2,000 to 3.40 million in the week ended February 18, the lowest since August 2008. In a separate report, the Commerce Department said US construction spending fell in January for the first time in six months as companies cut investment in buildings and the federal government scaled back projects.