WASHINGTON - A slowdown in manufacturing and construction means the economy needs to rely even more on exports to sustain growth.
Turmoil in the housing and financial markets appears to be spilling over to the broader economy, according to data released Tuesday that showed expansion in the manufacturing sector slowed in August while construction spending dropped sharply in July. Although exports remain a bright spot, analysts don't expect overseas sales to accelerate enough to prevent U.S. economic growth from slowing in the second half of this year.
'The debate is over whether the economy will be soft, very soft, or in recession,' said John Shin, a senior economist at Lehman Brothers who forecasts growth to slow to a 2 percent annual rate in the third quarter, down from 4 percent in the second quarter.
The Institute for Supply Management, an organization of corporate purchasing executives based in Tempe, Ariz., said its manufacturing index registered 52.9 in August, down from 53.8 in July and slightly below the expectations of Wall Street economists. Readings above 50 indicate expansion.
The Commerce Department, meanwhile, said construction spending dropped 0.4 percent in July, compared with June, the weakest showing since January. It was a bigger drop than economists had been expecting and underscored the drag the housing slump is having on building activity.
Economists blame the expected weakness later this year on a slowdown in consumer spending, resulting from declining home values and reduced credit availability.
Export growth continues to bolster the manufacturing sector, however, and will counteract some of the effect of the housing slowdown, economists said.
'I think it's going to be a draw,' said Mark Zandi, chief economist for Moody's Economy.com, referring to the impact of exports and housing on the economy.