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Thursday, 2 April 2009

Economy contracting at slower pace, no bottom yet

WASHINGTON (AP) -- New economic reports on construction spending, manufacturing and pending home sales suggest the recession may be moving closer to a bottom.

But most analysts think the low point is still months away, with more bad news likely before the economy stabilizes and begins to rebound.

"I think the best that can be said right now is that the pace of decline has slowed, but we are still heading down," said David Wyss, chief economist at Standard & Poor's in New York. "Any recovery is still a work in progress."

Wyss predicted that the recession, already the longest in a quarter-century, will last until September. But he said the decline in the gross domestic product in the current April-June quarter will probably be just half the 6.3 percent drop that was recorded in the final three months of last year.

The Commerce Department reported Wednesday that construction spending dropped 0.9 percent in February, the fifth straight monthly decline but less than the expected 1.5 percent decrease.

Meanwhile, a trade group's measure of the health of manufacturing in March showed that key sector of the economy shrank for the 14th straight month.

The Institute for Supply Management said its manufacturing index rose to 36.3 last month from 35.8 in February. Even with the small increase, the index is stuck well below the reading of 50 that is the dividing line between growth and recession. The index hit a 28-year low of 32.9 in December.

"Manufacturing is still totally in the dumps, but it doesn't seem to be sinking further," said Joel Naroff, chief economist at Naroff Economic Advisors.

March proved to be another dismal month for U.S. automakers as low consumer confidence kept buyers away. General Motors Corp. led the slide, with a 45 percent drop in sales compared with March 2008.

Ford Motor Co. reported a 41 percent decline, and Chrysler LLC said sales plunged 39 percent.

But on Wall Street, stocks rose after the construction and manufacturing reports were better than expected, and the National Association of Realtors said pending home sales rebounded in February from a record low. The Dow Jones industrial average added more than 152 points, or 2 percent, to 7761.60. Broader indicators also rose on the first trading day of the second quarter.

The 0.9 percent fall in construction spending was led by a 4.3 percent drop in housing. That pushed housing construction to the lowest level in 11 years. Home builders have cut back sharply, but they face a rising glut of unsold homes as record mortgage foreclosures dump more properties on the market.

The manufacturing report, based on a poll of the Tempe, Ariz.-based trade group of purchasing executives, covers indicators including new orders, production, employment, inventories and prices. None of the 18 manufacturing industries grew in March, and new jobs are unlikely before next year.

Inventories will need at least three more months to fall to healthy levels. When that happens, new orders could rebound "and then it's a number of months before you see any improvement in employment," said Norbert Ore, chair of the ISM manufacturing survey committee.

"It's going to be long, and it's going to be slow," Ore said.

The Commerce Department report showed nonresidential construction rose 0.3 percent in February. That was a slight rebound after a 4.3 percent drop in January that had been the biggest decline in 15 years.

With the financial sector facing its worst crisis in seven decades, banks have tightened their loan standards, making it harder to get financing for shopping centers and other commercial projects.

Analysts are forecasting that the commercial real estate industry is poised to fall into the worst crisis since the last great property bust of the early 1990s. Delinquency rates on loans for hotels, offices, retail and industrial buildings have risen sharply in recent months and are likely to soar through the end of 2010 as companies lay off workers, downsize or close.

Construction spending by the government showed a 0.8 percent increase in February after two months of declines. All the changes left total construction spending at a seasonally adjusted annual rate of $967.5 billion in February, the slowest pace since March 2004.

AP Business Writer Tali Arbel in New York contributed to this report.

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