Higher Crude Oil and Metals Prices Drive Up Factory Costs, Manufacturing Slows

Manufacturing growth in New York state unexpectedly slowed in May as costs of energy and raw materials jumped, a Federal Reserve report showed today.

Bloomberg News - Manufacturing growth in New York state unexpectedly slowed in May as costs of energy and raw materials jumped, a Federal Reserve report showed today.

The Federal Reserve Bank of New York's general economic index fell to 12.4, the lowest since June 2005, from 15.8 in April. Readings above zero signal expansion. The index averaged 15.6 last year.

Surging prices of crude oil and metals are driving up factory costs across the nation. The higher costs are being offset by rising demand, today's report showed, as measures of new orders, shipments and unfilled orders all increased.

``Manufacturing is still growing, but at a slower pace,'' said Richard Yamarone, chief economist at Argus Research Corp. in New York. The report is ``basically telling us that demand is solid and high energy and material prices are spooking some manufacturers.''

Economists expected the New York Fed's index to increase to 16.1 this month, based on the median of 46 forecasts in a Bloomberg News survey. Forecasts ranged from 9.5 to 21.

Economists and investors track the New York regional manufacturing survey for clues to the performance of factories nationwide, although the link between the two has recently weakened. For example, the regional survey and the national Institute for Supply Management's manufacturing index headed in opposite directions in March and April.

This divergence comes at a time of surging energy prices, which have driven oil futures on the New York Mercantile Exchange up 20 percent since the start of this year to $73.32 a barrel on May 11. The average price at the gasoline pump has surged 34 percent to $2.96 a gallon during the same period, according to the U.S. Department of Energy.

Six-Month Outlook

The New York Fed's outlook component, which measures expectations six months ahead, decreased to 31.3 this month from 42.7 in April. The index of prices paid for raw materials rose to 42.6 from 37.9.

The new orders index rose to 16.4 from 14.1 last month. Unfilled orders increased to 2.1 in May from minus 2.9, and the shipments index rose to 17.3 from 14.

Higher costs aren't deterring companies from adding new factories and warehouses, the survey showed. Of the companies in the survey planning new construction, 55 percent said spending this year will be about the same as last year. Only 7 percent said they would curtail building plans because of higher construction costs.

Energy Efficiency

``The irony of high energy prices is that they've acted as a trigger point for all of the cash on company balance sheets to be invested in new, more energy-efficient equipment,'' said Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc. ``Companies are also investing in more fuel-efficient buildings, so high energy prices are spurring construction spending.''

Jack Guynn, president of the Federal Reserve Bank of Atlanta, said May 5 that many manufacturers are not passing along higher energy costs to customers. Fed policy makers raised the nation's benchmark lending rate to 5 percent May 11.

``While energy is increasingly cited as a justification for price increases, many businesses, especially goods producers, can't or won't pass along higher costs,'' Guynn said. Still, he said, ``we don't know how long'' this will continue.

The New York Fed bank's inventories component dropped to 0.8 this month from 1.6. An index of prices received by factories increased to 14.8 in May from 14.5.

The New York survey's current manufacturing employment component declined to 9.1 in May from 17.4. The average workweek gauge rose to 8.8 from 5.4.

Night-Vision Goggles

Factory payrolls added 19,000 workers in April, the most in nearly a year, according to a separate report the Labor Department issued May 5.

Manufacturers are boosting production to meet increased demand. Businesses had enough goods on hand in March to meet 1.26 month's worth of sales at the current pace, close to the 1.25 month record-low established in January, the Commerce Department reported May 11.

ITT Industries Inc., the world's largest maker of pumps and military night-vision goggles, reported a 34 percent increase in its first-quarter earnings to $155.9 million on April 28. The White Plains, New York-based company reported a 6.8 percent gain in revenue.

``U.S. manufacturing is fine,'' Roger Kubarych, a senior economic adviser at HVB America Inc. in New York said before the report. ``Business investment is driving demand.''

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