The US manufacturing sector contracted for a third consecutive month in April as waning domestic demand acted as a drag on factory output even as exports continued to provide a source of strength.

A separate report showed US construction spending dropped much more than expected last month while the bulk of a reported increase in consumer spending was taken up by higher costs for food and energy.

The economic headwinds facing consumers were also reflected in the latest report on the US labour market which registered the highest number of Americans on unemployment benefits in four years, a potentially worrying signal ahead of Friday’s closely-watched jobs report.

The Institute for Supply Management’s manufacturing index held steady at 48.6 in April, below a reading of 50 which marks the inflection point between growth and contraction. Economists had forecast a slight decrease to 48.

Manufacturers have been hit by rising costs and slowing US demand which have cut into order books amid rising energy costs.

Many businesses have been able to offset some of these problems by selling more goods overseas as the weaker dollar makes US goods more attractive to foreign buyers.

Exports picked up last month and the backlog of orders index rose but new orders remained at a meagre 46.5, painting a grim outlook for future business activity.

Economists said an increase in business inventories may have been involuntary, as some businesses failed to anticipate a slowdown in demand while a sharp contraction in the employment index was a worrying indicator of labour market trends.

Spending in the construction sector fell 1.1 per cent in March after the previous month’s figures were revised sharply higher, the Commerce Department said on Thursday.

The net effect was significantly more than the 0.7 per cent decline forecast by economists and represented a total decline of 3.4 per cent from a year ago.

The bulk of the drop was accounted for by a record 4.6 per cent slump in residential construction spending over the month as builders shunned the prostrate real estate market.

Consumer spending holds up

Consumer spending rose 0.4 per cent over the same period, twice the rate forecast by economists and an improvement on the 0.1 per cent growth rate recorded the previous month.

Incomes rose 0.3 per cent, roughly in line with economists’ expectations after increasing by 0.5 per cent in March.

Adjusted for inflation, real spending increased only 0.1 per cent, having stalled in February while inflation-adjusted disposable income fell by slightly less than 0.1 per cent.

The core PCE price index, the Federal Reserve’s preferred inflationary measure which strips out food and energy costs, rose 0.2 per cent as expected, marking an increase of 2.1 per cent over the year, a fraction above the Fed’s stated comfort level of 2 per cent.

“While core PCE has moved marginally back above the Fed’s 1-2% comfort zone, the Fed is expected to remain tolerant of inflationary pressures as long as growth conditions remain weak,” Michael Woolfolk, senior currency strategist at the Bank of New York Mellon, said.

The US economy grew at a paltry 0.6 per cent annual rate in the first three months of this year as consumer spending slowed to a crawl and investment in capital goods and residential infrastructure contracted sharply.

Real personal consumption expenditure increased at only a 1 per cent annual rate in the first quarter, the weakest growth rate since 2001.

Jump in numbers on jobless benefits

The number of Americans remaining on unemployment benefits rose to the highest level since 2004 as employers cut back on hiring amid an uncertain outlook for the US economy.

Continuing claims for unemployment benefits jumped by 74,000 to 3.019m in the latest week while first-time jobless claims rose 35,000 to 380,000.

The increase in initial claims was much greater than economists had forecast but this gauge tends to be volatile and fell by about the same amount the previous week.

“Given that initial jobless claims have averaged 372,000 in the seven weeks since mid-March, today’s reading seems to be around the trend pace,” Omair Sharif, strategist at RBS Greenwich Capital, said.

The four-week moving average, a smoother barometer of the labour market, declined from 370,250 to 363,750.

Friday’s closely-watched jobs report is expected to show that employers cut staff for a fourth consecutive month, registering an overall decline of 70,000 jobs.