April 1 (Bloomberg) -- Manufacturing in the U.S. contracted less than forecast in March, easing concern that less consumer spending and business investment will cause a deeper economic slump.
The Institute for Supply Management's manufacturing index increased to 48.6 from 48.3 in February. Fifty is the dividing line between contraction and expansion. The Commerce Department reported in Washington that construction spending in February also dropped less than economists had projected.
Traders pared bets on a half-point interest-rate cut by the Federal Reserve this month after the reports, and stocks advanced. Exports, spurred by a falling dollar and expanding economies abroad, are helping sustain U.S. factories as American demand falters, the ISM report showed.
``The bottom line is this economy is still contracting; the good news is it's not a huge amount,'' Nariman Behravesh, chief economist at Global Insight Inc., a Lexington, Massachusetts, forecasting firm, said in an interview with Bloomberg Television. Data, along with Fed efforts to stabilize financial markets, point to a ``short and fairly mild'' recession, he said.
Economists forecast the ISM measure would fall to 47.5, according to the median of 71 projections in a Bloomberg News survey. Estimates ranged from 44.9 to 50.
Treasuries dropped to their lows of the day after the reports, with yields on 10-year notes rising to 3.55 percent at 11:30 a.m. in New York, from 3.42 percent late yesterday. The Standard & Poor's 500 stock index was up 2.1 percent, at 1,351.
Fed Rate
The chance of a half-point cut in the Fed's benchmark interest rate, to 1.75 percent, eased to 28 percent from 52 percent late yesterday. The central bank has lowered the rate 3 percentage points since September.
Fed Chairman Ben S. Bernanke will elaborate tomorrow on the economic outlook before the Joint Economic Committee of Congress.
The 0.3 percent decrease in construction spending followed a revised 1 percent drop in January that was smaller than initially reported, the Commerce Department said. Building of private non-residential projects including offices declined for a third straight month.
Homebuilding is likely to slow economic growth for a third year as sales continue to fall and builders delay new projects to work off almost 10 months of inventory. Stricter lending standards spawned by subprime mortgage defaults now are restraining commercial projects, which until recently were a source of strength.
`Shallow Event'
``The economy is entering a recession, but not falling off a cliff,'' said Robert Dye, senior economist at PNC Financial Services Group in Pittsburgh. ``So far, it looks to be a short and shallow event.''
The ISM gauge of new orders decreased to 46.5, the lowest since October 2001, while a production measure fell to 48.7 from 50.7. Supplier deliveries rose to a 53.6 reading, from 50.1 in the prior month.
A measure of exports climbed to 56.5 from 56 in February. The group's inventory index fell to 44.9 from 45.4 and its gauge of order backlogs improved to 47.5 from 45. The employment index increased to 49.2 from 46.
Higher energy costs are also hurting companies' profits and their ability to spend on employment and on equipment and projects. The ISM's measure of prices paid increased to 83.5 from 75.5 in February. Economists surveyed by Bloomberg News forecast the prices paid component would fall to 75.
Calculation Change
The purchasers' group changed the composition of the headline index this year to a simple average of the orders, production, employment, supplier deliveries and inventory measures. Previously, the components were given different weights.
The orders index by itself is the best predictor of economic growth in the current or next quarter, according to a study issued yesterday by Seamus Smyth, an economist at Goldman Sachs Group Inc. The inventory gauge, the only other component to have had predictive ability, has become less significant since 2000, the report said.
Regional surveys in recent weeks signaled manufacturing contracted last month. Reports from the Federal Reserve Banks of Philadelphia and New York and a survey yesterday from a purchasing managers' group in Chicago all pointed to a contraction.
Profits dropped 3.3 percent in the fourth quarter from the previous three months, the Commerce Department said on March 27. It was the second consecutive decline.
Spending Stagnates
Consumer spending, which accounts for more than two-thirds of the economy, has been stagnant since December and businesses have cut orders for long-lasting goods in the first two months of 2008. Plummeting confidence in the economy and lower profits indicate spending is unlikely to rebound in coming months.
Industry figures today are forecast to show sales of cars and light trucks fell to a 15.2 million annual pace last month from 15.3 million in February, according to analysts and economists surveyed. U.S. auto sales fell 5.4 percent in January and February compared with the same time in 2007 and may drop this year to their lowest total in a decade.
Some automakers are offering bigger discounts to drum up demand as gasoline prices soar to a record and mounting defaults prompt banks to make it more difficult to borrow.
``There's a lot more economic uncertainty than we thought,'' Mark LaNeve, North American marketing chief for General Motors Corp., the world's largest automaker, said in a Bloomberg Television interview on March 19. ``With consumers in a pinch and some of the liquidity and credit issues we are experiencing in the economy, we are being more aggressive with incentives.''
Production Drop
The manufacturing slump deepened in February as factories turned out fewer cars and appliances and made less furniture. Industrial production dropped a greater-than-forecast 0.5 percent, according to figures from the Fed issued last month.
The slowdown in spending and investment indicates the economy grew at a 0.1 percent pace in the first three months of the year following a 0.6 percent pace of expansion in the fourth quarter, according to the median estimate of economists surveyed by Bloomberg last month.
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