Cooling factory activity hints at slowing US economy

US factory activity grew at the slowest rate in three months in March, suggesting the economy lost some momentum at the end of the first quarter as the effects of tighter fiscal policy started kicking in.

Data so far this year had shown little sign that higher taxes, and the $85 billion in across-the-board US government spending cuts that took effect March 1 known as the "sequester," had weighed on economic activity.

"It suggests the economy was probably starting to slow at the end of the quarter, possibly reflecting the impact of the fiscal headwinds coming from sequestration and higher taxes," said Millan Mulraine, a senior economist at TD Securities in New York. The Institute for Supply Management said on Monday its index of national factory activity fell to 51.3 last month from 54.2 in February. A reading above 50 indicates expansion in the manufacturing sector. New orders, a key indicator of future growth, accounted for much of the drop in the index.

The ISM report was at odds with a separate report showing that factories gained steam in March on strong order growth, closing out the best quarter for the sector in two years. Financial data firm Markit said its US Manufacturing Purchasing Managers Index rose to 54.6 last month from 54.3 in February. A reading above 50 indicates expansion. While the two surveys use the same sub-indexes, they assign different weights to the components.

Economists and investors placed more emphasis on the ISM survey, which has a longer history and has been generally a good gauge of overall US economic activity. US stock prices fell in light trade, with the Standard & Poor's 500 index stepping back from last Thursday's record closing high. US financial markets were closed on Friday for Good Friday.

The price for the longer-dated US government bond rose, while the dollar fell to a near month low against the yen. "We are beginning to see where the government spending cuts will reduce demand," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "In those sectors and parts of the country that will feel the wrath of sequestration, adjustments are being made."

The US Labor Department employment report for March to be released on Friday could shed more light on the US economy's health. Though factory activity slowed last month, there were pockets of strength. Export orders approached a year high and factory employment was the highest since June.

In addition, both manufacturers and their customers maintained lean inventories, which economists said pointed to a ramping up of activity later this year. Last month's pullback did not, however, change perceptions that economic growth in the first quarter accelerated after almost stalling in the last three months of 2012.