NEW YORK (CNNfn) - U.S. manufacturing shrank for the second straight month in September, further evidence that the economy is slowing and a sign that the Fed may again leave interest rates alone.
Also Monday, the government reported an uptick in construction spending in August.
The National Association of Purchasing Management said its index of manufacturing rose slightly to 49.9 percent from 49.5 percent in August but remained below 50 -- the level that points to growth in U.S. manufacturing.
While the September figure is slightly higher than the previous month, it indicates that manufacturing remains sluggish, reinforcing views that the industrial sector is slowing down.
The NAPM report is closely watched, since it is the first report of the month providing a national economic picture, and manufacturing accounts for a quarter of the U.S. economy.
It is particularly significant this month since it comes a day ahead of the October meeting of the Federal Open Market Committee, the policy making arm of the Federal Reserve, which decides whether to raise interest rates.
Analysts believe the Fed is likely to leave rates alone Tuesday given the signs of a slowing economy, slower retail sales, and high oil prices. A strong dollar in Europe has also cut into many companies' profitability. Monday's report adds to that speculation. Further, economists believe the Fed is likely to hold rates steady with a presidential election around the corner.
"The headline was a little softer than we expected. We thought it would be something in the neighborhood of 51," Ram Bhagavatulla, chief economist at NatWest Global Financial Markets said. "But prices paid is picking up, so I think what you're going to see a little bit is that economic activity in real terms will not be quite as strong going forward as it was in the first quarter."
The NAPM cited fewer orders and stepped up deliveries as indicators of contraction in the manufacturing sector.
"The manufacturing sector failed to grow in September with additional signs of softness appearing as supplier deliveries have accelerated and new orders continue to slide downward," Norbert Ore, chairman of the NAPM's business survey committee, said. "The bright spots were September's production and employment indexes as they recovered above the 50 mark, reversing the downward trends. The NAPM prices index continues to indicate manufacturers are paying higher prices for their purchases and suffer the instability of energy prices, which translate into higher costs."
The report's "prices paid" component, a closely watched gauge of inflationary pressure at the production level, rose to 58.1 from 56.2 in August, reflecting higher energy costs.
The NAPM new orders index fell to 49.1 in September from 49.7 in August, suggesting a future weakness in manufacturing.
"This is just one more sign of moderation. I'm in the camp that says the economy has entered a soft landing, and 49.9 is as neutral a number as you can get other than 50," Jeff Thredgold, an economic consultant for Zions Bank Capital Markets, said.
Carey Leahey, senior economist at Deutsche Bank Securities, agreed.
"This is the weakest indicator of the manufacturing sector that we have, and it suggests that the manufacturing sector is going nowhere, but it is not generating any new weakness, and maybe generating a bottom," Leahey said. "So unless you think the oomph is really out of the overseas economies, I think this is about the worst it's going to get."
Separately, the government said construction spending increased 1.4 percent in August to a $794.5 billion annual rate. Wall Street forecasters had predicted a rise of 0.5 percent after July's revised 1.9 percent decline.
During the first eight months of 2000, $525.9 billion of construction was put in place, 6 percent above the $497.1 billion for the same period a year ago.
Americans continued building new houses in August as spending on new residential housing units came in at a seasonally adjusted annual rate of $254.4 billion, nearly the same as the revised July estimate of $254.6 billion.
-- from staff and wire reports