Economists largely blamed frigid temperatures for the chill in
economic activity and said they expected a rebound in the months
ahead. However, they also cautioned that the economy was receiving
some payback after a strong performance in the second half of 2013.
"The disappointing data provide further confirmation of a dramatic
slowing in economic growth momentum," said Millan Mulraine, deputy
chief economist at TD Securities in New York.
The Institute for Supply Management (ISM) said its index of national
factory activity fell to 51.3 last month, its lowest level since May
2013, from 56.5 in December.
Bad weather also appeared to hurt U.S. auto sales in January, with
Ford Motor Co, General Motors Co and Japan's Toyota Motor Sales USA
reported a slide in sales for the month.
U.S. stocks fell sharply on the manufacturing data, with the Dow
Jones industrial average off 1.5 percent and the S&P 500 losing 1.7
percent. The yield on the benchmark 10-year Treasury note hit its
lowest level since early November and the dollar dropped against a
basket of currencies.
Mulraine, however, said "to the extent that this weakening can be
attributed to weather-effects, we expect activity to rebound
meaningfully in the coming months."
January's ISM figure was also well below the median forecast of 56
in a Reuters poll of economists, missing even the lowest estimate of
54.2. Readings above 50 indicate expansion.
It was the second straight month of slowing growth from November's
recent peak reading of 57, which had been the highest since April
2011, and indicated manufacturing was slowing after output grew at
its fastest pace in nearly two years in the fourth quarter.
Underscoring the weather impact, delivery delays increased a bit
last month, but the biggest red flag was the huge drop in the
forward-looking new orders index, which fell to 51.2 from 64.4 in
December. That 13.2-point drop was the largest monthly decline in
the key component since December 1980.
"While the magnitude of the decline in the ISM index may have
exaggerated the degree of cooling in the underlying pace of factory
activity, it reinforces our belief that the optimism surrounding a
burst of capital investment in 2014 is overdone," said Michelle
Girard, chief economist at RBS in Stamford, Connecticut.
Economists also noted that the ISM survey had been running too
strong relative to other factory indicators.
SLOW FIRST-QUARTER GROWTH EYED
In a separate report, the Commerce Department said construction
spending rose 0.1 percent in December, slowing from the prior
month's 0.8 percent increase.
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While private construction spending hit a five year high, outlays on
public construction projects recorded their biggest drop in a year,
reflecting the drag from weak state and local government spending.
The soft construction spending data will probably not have much
effect on the government's advance fourth-quarter gross domestic
product estimate as it was broadly in line with assumptions.
The government reported last week that the economy grew at a 3.2
percent annual pace, supported by consumer spending, exports and
inventory accumulation, after logging a 4.1 percent rate in the
It expanded at a brisk 3.7 percent pace in the second half of the
year, up sharply from 1.8 percent in the first six months of the
year. It was the biggest half-year gain since the second half of
Exports are not expected to match their strong growth and businesses
are expected to step back from restocking. When added to the impact
of cold weather, that suggests a slowdown in first quarter growth is
in the cards, analysts said.
Indeed, the ISM survey showed a pullback in new export orders and a
contraction in inventories.
"An earlier pickup in manufacturing production and inventory
building in the second half of 2013 is slowing down," said Ryan
Wang, a U.S. economist at HSBC in New York.
The prices index hit an 11 month high. Economists, however, said
that was mostly energy-related after the cold snap caused a shortage
of propane and pushed up prices for electricity and heating oil in
some parts of the country.
An indicator of employment fell to its lowest level since June.
Economists said that posed a downside risk to expectations of a
rebound in employment in January after a surprise slowdown in
January's employment report will be released on Friday and is
expected to show nonfarm payrolls rebounded to 185,000 in the month
from 74,000 in December, according to a Reuters survey.
(Reporting by Lucia Mutikani and Dan
Burns; editing by Paul Simao)
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