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Gauge Of U.S. Manufacturing Sinks

Mon, 06/03/2013 - 11:17am
Christopher S. Rugaber, AP Economics Writer

WASHINGTON (AP) -- A measure of U.S. manufacturing fell in May to its lowest level since June 2009 as slumping overseas economies and weak business spending reduced new orders and production.

The Institute for Supply Management said Monday that its index of manufacturing activity fell to 49 last month from 50.7 in April. That's the lowest level in nearly four years and the first time the index has dipped below 50 since November. A reading under 50 indicates contraction.

A gauge of new orders fell to 48.8, the lowest in nearly a year. Production dropped to its lowest point since May 2009, and employment dipped.

Manufacturing has struggled this year as weak economies abroad have slowed U.S. exports. U.S. businesses have also reduced their pace of investment in areas such as equipment and computer software.

At the same time, consumers are holding back on spending more for factory-made goods, possibly a result of higher Social Security taxes, which have reduced most workers' paychecks this year.

Monday's weak manufacturing reading suggests that the economy will slow in the April-June quarter from its 2.5 percent annual pace in the first three months of the year. Many analysts expect the economy's annual growth rate this quarter to be about 2 percent.

The drop below 50 in the ISM's index does not mean the overall economy is shrinking. Manufacturing represents just a small fraction of U.S. output.

"The other 88 percent of the economy appears to be doing better, led by housing," said Jim O'Sullivan, an economist at High Frequency Economics, a forecasting firm.

The ISM's survey found that the furniture and wood products industries reported higher new orders, a sign that they're benefiting from rising home sales and construction.

The drop below 50 in the ISM index may also be temporary, economists said.

"A jump in summer auto production should give manufacturing a decent domestic boost in coming months," Ted Wieseman, an economist at Morgan Stanley, said in a note to clients.

On Monday, auto companies reported healthy sales for May.

Ford Motor Co. said its U.S. sales rose 14 percent as demand for its F-Series pickup reached a six-year high. Nissan's U.S. sales jumped 25 percent compared with a year ago. Chrysler reported its best May figures since 2007; its sales rose 11 percent.

Other signs have suggested that manufacturing could pick up in coming months. U.S. factories received more orders in April after a steep fall in March, according to a Commerce Department report. Companies ordered more U.S. machinery, electronic products and other equipment that reflect their investment plans.

But Bradley Holcomb, chair of the ISM's manufacturing survey committee, said the ISM index pointed to weakness in some areas of consumer spending. Several industries reported falling new orders, including for computers and electronic products. Clothing companies also said orders fell.

Deep government spending cuts may have reduced business for some companies. The ISM said one company in the computer and electronics industry blamed the federal spending cuts, which began taking effect March 1, for slowing its business.

A measure of export orders fell to its lowest level since January, a sign of weak overseas demand.

A separate report Monday said a measure of Chinese manufacturing dropped last month to 49.2 from 50.4 in April. As with ISM's index, a reading below 50 indicates contraction. The figure added to signs that a resurgence of China's economy, the world's second-largest after the United States, might be losing momentum.

Europe remains mired in recession and is buying fewer U.S. goods. In the first three months of the year, U.S. exports to Europe fell 8 percent compared with the same period a year ago.


 

Cliff Waldman, Senior Economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), has added his thoughts: “In yet another report that demonstrates the impact of global economic weakness on U.S. manufacturing growth, the Institute for Supply Management (ISM) reported that U.S. factory activity actually contracted in May, with the Index falling to 49.0 (below the 50.0 threshold for growth) from 50.7 in April. This is the first contraction that the ISM report has shown since November of 2012 and is fairly broad-based, with notable weakness in new orders, production, and the backlog of orders.  Short-term volatility due to sharp inventory swings, as well as weather-related distortions to the normal seasonality characteristic of the early months of the year, have been a part of the manufacturing growth picture in recent years, suggesting caution in interpreting monthly data.  It is certainly notable that manufacturing output grew at a seasonally adjusted 5 percent annual rate in the first quarter of 2013.

“Nonetheless, in three of the first four months of 2013 manufacturing output actually contracted, a disturbingly consistent pattern that suggests that current weakness may be reflective of a fundamental slowdown,” Waldman added. “While the world economy is more stable, U.S. factories are confronting a challenging global environment with an ongoing and widening recession in Europe and a sluggish rebound from a significant emerging market slowdown.  Further, while the U.S economy continues to grow, it is, as recent consumer spending data shows, slow and choppy growth laced with great monetary and fiscal policy uncertainty.

“Pent-up demand for transportation equipment and a realignment of inventories with demand should allow U.S. manufacturing to grow just a bit more quickly than the overall economy during 2013. But it will be slow manufacturing growth by historical standards and the risk of something worse than just sluggish factory output gains cannot be ignored.”

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