The latest ISM manufacturing report shows solid expansion in March 2011 for the 20th consecutive month, despite a decline in the index to 61.2 in March from 61.4 in February. An index reading above 50 indicates sector expansion. The decline in March was smaller than market expectations for a 61.0 reading.

The employment component fell as well but remained solidly in expansionary territory at 63.0, below the 64.5 reading in February but still above the 61.7 level in January.

Despite the modest dip in the headline reading, the ISM manufacturing index remained solidly in expansionary territory in March. The small decline in the headline index in March was largely the result of a drop in the new orders sub-index to 63.3 from 68.0 in February. The employment index slipped slightly to a still solid 63.0 in March from 64.5 in February; however, partial offset was provided by a gain in the production index to 69.0 in March from 66.3 in February, its highest level since January 2004. With respect to inflationary pressures, the prices paid component climbed further in March to 85.0 from 82.0 in February and 81.5 in January.

The tick down in the ISM manufacturing index in March from already elevated readings in February and January boosted the average for the first quarter of 2011 as a whole to 61.1 following a 57.9 reading in the fourth quarter of 2010. This marks the highest reading, on a quarterly average basis, since 1983 and suggests that manufacturing activity continued to expand early in 2011; however, the February construction numbers suggest that business investment may be weaker in the first quarter of 2011 than we previously expected. This, along with indications that consumer spending growth likely slowed to 2% in the first quarter of 2011 following a 4.0% increase in the fourth quarter of 2010 suggests that, despite the expansion in manufacturing, the pace of GDP growth likely slowed moderately in the first quarter of 2011 to 2.8% from the 3.1% increase in the fourth quarter of 2010. With that said, continued employment growth, evident both in the employment sub-index of the ISM report and the stronger than expected 230,000 gain in private employment in March, which was reported earlier this morning, bode well for consumer spending, and GDP growth, to pick up strength going forward. This is consistent with our forecast for GDP growth, on an annual basis, to strengthen to a 3.3% rate in 2011 following the 2.9% increase recorded in 2010 and the 2.6% drop in 2009.

Separately from ISM, construction spending in the U.S. fell 1.4% in February, which was well below market expectations for a smaller 0.2% decline in the month. The weakness in February was split evenly between the private (-1.4%) and public (-1.3%) sectors. The decline in private spending was led by a 3.7% decline for residential construction spending that more than retraced a 3.6% increase in January. Private non-residential construction rose 0.9% in February, although this only partially retraces an outsized 8.0% drop in January that likely reflected the effect of poor weather in that month.

To read the ISM manufacturing report, click here.