US manufacturing stumbled in February after a strong start to the year, suggesting a sustained recovery in economic growth and employment remains an uncertain prospect at best.
Even Americans' love affair with the automobile seemed to be feeling the chill, with industry figures showing sales slowed further in February after a sharp pullback the month before.
That led many economists to predict a fall in overall retail sales in February, the second in as many months, while General Motors Corp. slashed its production forecasts for the second quarter.
There was bright news on the housing market, where a building boom is in full swing, but even that was balanced by a surprising drop in personal consumption in January.
"The economy is standing on only one leg - housing," said Ethan Harris, co-chief economist at Lehman Brothers. "It's not the most stable of platforms to be building growth from."
Murmurs of unease in manufacturing grew to a hubbub in the Institute for Supply Management's survey of purchasing managers. Its main business index slipped to 50.5 in February from 53.9 in January, well below market forecasts of 52.4 and only just above the 50.0 barrier that separates growth from contraction.
Alarming for an already-depressed jobs outlook, the ISM's employment index slumped to 42.8 from 47.6, its lowest reading in a year and a grim omen for the February payrolls report due this Friday.
"No one is hiring; all the leading indicators of employment are weak and I would not be surprised at all to see another fall in payrolls," said Ram Bhagavatula, chief economist at Royal Bank of Scotland Financial Markets.
Analysts have been looking for payrolls to rise a tiny 8,000 in February after January's 143,000 bounce, but that forecast could well turn negative.
The gloom took its toll on equities, erasing any relief over developments on Iraq and dragging the Dow Jones industrial average down 53.22 points, or 0.67 per cent, to 7,837.86. The broader S&P 500 shed 6.34 points to 834.81. In contrast, Treasuries took heart from the belief that the economy is too weak for the Federal Reserve to contemplate raising US interest rates - and may yet have to cut again. Benchmark 10-year yields stood at 3.68 per cent, only a whisker above five-month lows of 3.66 per cent hit last week.
Much of the deterioration in the overall ISM survey was due to a relatively large seven-point slide in new orders to 52.3, a jarring development since orders are considered a leading indicator of production.
"It was pretty much across every industry," noted Norbert Ore, chairman of the ISM manufacturing business survey committee, pointing to Iraq as a major factor. "The threat of war is dampening demand and that applies to every industry."
He also singled out the impact of higher energy prices, which are squeezing both demand and profit margins. "Energy is functioning as a tax on growth," Ore said.
Oil prices hit a decade high near $40 a barrel last week, although weekend developments in Iraq and Turkey caused prices to ease back to $36 on Monday.
Baghdad's move to destroy some banned missiles and Turkey's decision to block a US request to use its territory for an attack on Iraq were seen as possibly delaying a war.
Other figures had mixed implications for growth this quarter.
Personal consumption fell 0.1 per cent in January, versus forecasts of a 0.1 per cent rise, while income rose 0.3 per cent, against estimates of a 0.4 per cent gain.
Analysts noted real consumption, adjusted for inflation, fell a steeper 0.3 per cent, largely due to the slump in demand for autos, and that suggested spending made less of a contribution to GDP in January than first thought.
Indeed, the weak result caused some analysts to shave their forecasts for consumption and GDP growth this quarter. Estimates are still fluid, but most are crowded in the 2.0 per cent to 3.0 per cent area, compared with an annualised 1.4 per cent rise in GDP in the last three months of 2002.
Still, the softness was balanced in part by another spectacular performance from the home building industry, where residential spending jumped 2.5 per cent to a record high in January, courtesy of ultra-low mortgage rates.
That compensated for a depressed office and industrial sector and lifted overall construction spending by 1.7 per cent, well above economists' forecasts for a second month in a row.