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Housing Slump Spurs Construction Slump

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NEW YORK — Dark clouds continue to hang over the economy: The manufacturing sector shrank for the fourth consecutive month, construction spending has been falling for more than two years, future orders are down and prices are skyrocketing.

The few bright spots, such as strong exports, may be the only things between us and a protracted recession, analysts said on Monday.

"It's exports, and, of course, government spending, that's keeping us above water," said John Silvia, chief economist at Wachovia Corp.

The Institute for Supply Management said Monday that its manufacturing index rose to 49.6 from 48.6 percent in April. It beat expectations of 47.9, according to the consensus estimate of Wall Street economists surveyed by Thomson Financial/IFR.

Still, it was below a reading of 50, signaling that business for machine-tool makers, chemical producers, food companies and many other industries are contracting.

And it appears activity could continue to shrink. Order backlogs, an indication of future work, fell 5.5 percentage points lower than April.

The report is "not a number that gives you a clear signal that things are going to improve dramatically, but given the overall report, it gives you some optimism," said Oscar Gonzalez, an economist at John Hancock Financial Services. "At least by this report, the economy is not heading into a severe recession."

Wall Street took little comfort in the data, however. Stocks fell in afternoon trading.

The Dow Jones industrial average fell 134.50, or 1.06 percent, to 12,503.82. The Standard & Poor's 500 fell 14.71, or 1.05 percent, to 1,385.67 and the Nasdaq composite fell 31.13, or 1.23 percent, to 2,491.53.

The ISM index has been hovering near its lowest level in five years. Some of the most pronounced weakness is in businesses related to construction, as the worst housing slump in decades shows no sign of abating.

The Commerce Department reported that construction activity fell 0.4 percent in April, following a 0.6 percent decline in March. Spending has not increased since last September.

Private residential housing construction dropped by 2.3 percent last month, the 26th consecutive monthly decline. Private nonresidential building rose by 1.6 percent, however. Spending on shopping centers, office buildings and hotels gained despite the slump in business and vacation travel because of the slowing economy and rising costs for gas and air tickets.

For manufacturers, prices continue to rise for everything from adhesives to scrap metal. The ISM's index of prices, which rose in May, is now the highest it has been since April 2004. Costs climbed for all commodities except zinc and methanol, a building block for chemical products from construction materials to windshield washer fluid.

"Manufacturers find themselves caught between rising costs and weakening demand in many industries," Norbert J. Ore, chairman of ISM's manufacturing business survey committee, said in a statement accompanying the report. "Exports continue strong due to the weak dollar _ without the weak dollar the story would be much more negative in manufacturing."

Paul Shipman, founder and CEO of Redhook Brewery in Woodinville, Wash., said prices for the primary ingredients for beer, malt and hops, stayed flat from 1982 until a few years ago.

"It's really quite intense," he said. "We're still somewhat protected by long-term contracts and having fairly large purchases. When we talk to smaller producers in the specialty beer business, they're feeling it head on."

The rising cost of food and fuel, and the added inflation they could spark, may prompt the Federal Reserve to maintain interest rates at current levels when its policy-setting committee meets on June 25. The Fed last lowered rates to 2 percent in April, signaling the campaign that reduced rates seven times from 4.75 percent could be ending.

While inflation has battered U.S. consumers, the weak dollar has made U.S. exports cheaper for foreign buyers; as a result, exports grew at a 2.8 percent pace in the first quarter, boosting businesses throughout the economy.

Pork farmers say record exports are helping them weather soaring feed costs. Jeweler Tiffany & Co. said Friday that sales to foreign tourists visiting its New York flagship store boosted first-quarter same-store sales there by 16 percent; sales at other U.S. stores fell 4 percent. Coca-Cola Inc., International Business Machines Corp. and Google Inc. have all credited the weak dollar with helping sales.

The overall downturn, however, has begun to hit state and local governments, whose spending and hiring has cushioned the economy until now. States face budget shortfalls of at least $39 billion for the coming fiscal year, which begins July 1 in most states, making staff and spending cuts a near certainty.

The federal government expects to finish distributing its $110 billion in stimulus checks to taxpayers by mid-July. Checks distributed so far seem to have done little to boost consumer spending or confidence.

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Associated Press Economics Writer Martin Crutsinger contributed to this report.