Exports seen as key driver for economy

WASHINGTON (AP) - 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.

Zandi expects that exports will be even more important next year, as the impact of the housing slump declines and global economic growth continues to increase demand for U.S. goods overseas.

U.S. manufacturers of aircraft, medical devices and agricultural and construction equipment will continue to benefit from a weak U.S. dollar, economists said, which makes U.S. goods less expensive abroad.

Boeing Co., for example, expects to deliver 515 to 520 planes next year, with approximately 70 percent going overseas, said Jim Proulx, a company spokesman. That's up from the 440 to 445 the company is on track to deliver this year.

Construction and agricultural equipment maker Deere & Co. said last month that its third-quarter profit jumped 23 percent on strong international sales.

Approximately 30 percent of the farm and construction equipment made in the United States is for export, according to Tom Runiewicz, industrial economist at consulting firm Global Insight.

The ISM survey found that manufacturing exports remained healthy, with the new export orders index increasing to 57 from 56.5 in July.

There were several other positive signs for the economy in the ISM survey. The production and employment indices increased, while new orders declined but remained above 50.

"Overall, this report reinforces other indicators showing modest but uneven growth across the manufacturing sector," David Resler, chief economist at Nomura Securities, wrote in a research note.

The stock markets reacted positively, as investors decided that several aspects of the manufacturing report make it more likely that the Federal Reserve will cut interest rates at its next meeting Sept. 18.

The Dow rose 117.87 points to 13,475.61, the Nasdaq up 43.05 to 2,639.41 and the S&P 500 up 19.49 to 1,493.48.

The ISM's prices paid index dropped to 63 from 65, its fourth consecutive month of decline. That could indicate that "inflation concerns are cooling off," Shin said, which could enable the Federal Reserve to cut rates at its next meeting Sept. 18.

At the same time, the ISM index isn't high enough to indicate runaway growth, which would give the Fed pause, he said.

"When you add it all up, it's more encouraging news for a market that's really anticipating a rate cut in a couple of weeks," Shin added.

The market is discounting the July construction spending data, he said, because it is a month old and reflects the well-known difficulties in housing.

The ISM new orders index came in at 55.3, below July's reading of 57.5, while the production index registered 56.1, an increase from 55.6 in July.