U.S. manufacturing contracts, consumer spending up

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. manufacturing shrank at a less severe pace last month and consumer spending bounced back in January, data showed on Monday, but the improvement was likely a blip amid a rapidly deteriorating economy.

Evidence that the 14-month economic downturn was deepening came from a report showing spending on construction projects slumped to the lowest level in over four years in January.

With household wealth falling sharply and revenue-squeezed companies aggressively laying off workers, the economic rout is set to worsen in the months ahead, analysts said. The government has stepped in with a $787 billion stimulus package.

"Perhaps consumer spending in the first quarter is not going to decline quite as rapidly as people thought," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. "But if you put all the numbers together they show the economy contracting at least as fast in the first quarter as it did in the fourth quarter."

Coming on the same day as a record $61.7 billion quarterly loss at American International Group (AIG.N) and a new government bailout for the insurer, the data helped drive the Dow Jones .DJI to close below 7,000 for the first time since May 1997. U.S. government bond prices rallied as investors sought safety in low-risk assets.

The Institute for Supply Management's index of national factory activity inched up to 35.8 in February from 35.6 the prior month, but the employment gauge dived to a record low, raising the specter of an ugly nonfarm payrolls report on Friday.

The modest improvement in the overall index contributed to stability in global manufacturing activity in February. U.S. manufacturers said the gain was likely due to the resumption of production at some auto plants after long holiday closures.

"Manufacturing is still mired in the worst downturn since the 1973-74 recession, and there is little on the horizon to suggest improvement," said Thomas Duesterberg, president of the Manufacturers Alliance/MAPI in Arlington, Virginia.