Bloomberg News

U.S. Economy: Manufacturing Almost Stalls as Orders Drop

August 01, 2011

(Updates with closing markets in sixth paragraph.)

Aug. 1 (Bloomberg) -- Manufacturing in the U.S. almost stalled in July, threatening to deprive the two-year recovery of one of its main drivers.

The Institute for Supply Management’s factory index slumped to 50.9, the lowest since July 2009, from 55.3 a month earlier, the Tempe, Arizona-based group said today. Figures less than 50 signal contraction, and the July index was lower than the most pessimistic forecast in a Bloomberg News survey.

Stocks declined and Treasuries rallied as orders shrank for the first time since June 2009, indicating production and economic growth may be limited. Other reports today indicated a global slowdown as factory measures from Asia to Europe dropped.

“Businesses have cut back on orders and employment because they are just not seeing the demand that they expected,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “The economy is just not picking up momentum in the second half.”

The median forecast in the Bloomberg survey of 80 economists called for a decline to 54.5. Estimates ranged from 51 to 56.

Stocks erased an early rally triggered by speculation U.S. lawmakers will vote in favor of a plan to raise the debt ceiling. The Standard & Poor’s 500 Index declined 0.4 percent to 1,286.94 at the 4 p.m. close in New York. Treasuries rose, pushing down the yield on the benchmark 10-year note to 2.75 percent from 2.80 percent on July 29.

Asia to Europe

U.K., Russian and Australian manufacturing shrank, while the pace of factory growth slowed in Europe and China, according to other surveys today.

The U.S. ISM report showed the new orders measure dropped to 49.2 in July from 51.6, while orders waiting to be filled fell to the lowest since April 2009. The measure of production in July decreased to the lowest level since June 2009, while inventories contracted.

A gauge of factory employment declined to the lowest since December 2009, while a measure of exports increased.

Americans are reducing purchases in response to sluggish job creation and higher fuel costs. The economy expanded at a 1.3 percent annual rate in the second quarter, less than forecast, Commerce Department figures showed last week. Household spending rose at 0.1 percent pace, the weakest since the second quarter of 2009.

Federal Reserve

Growth cooled in eight of the Federal Reserve’s 12 regions, the central bank said last week in its Beige Book survey. Many regions said manufacturing slowed or held steady, according to the report, which covered June and the first half of July.

Fed policy makers, including Chairman Ben S. Bernanke, said they anticipate the economy will strengthen in the second half of 2011 as “factors that are likely to be temporary” subside.

A Commerce Department report today showed construction spending rose for a third straight month in June, led by a gain in nonresidential building. The 0.2 percent increase followed a 0.3 percent revised gain that was previously reported as a decrease.

Dow Chemical Co. Chief Executive Officer Andrew Liveris said his company sees “growth continuing to gain traction in developed markets, albeit at a somewhat uneven and jagged pace given persistently high unemployment in the U.S. and sovereign debt concerns in Europe.”

“In fast-growing emerging geographies, despite some inflationary pressures, the rapid expansion of the middle class continues to drive robust underlying fundamentals,” Liveris said in a July 27 statement.

Manufacturers may need to rely more on overseas demand, which is being driven a weak U.S. dollar.

Dow, the largest U.S. chemical maker, reported second- quarter profit that exceeded analysts’ estimates, led by gains in basic chemicals and plastics.

--With assistance from Chris Middleton and Shobhana Chandra in Washington. Editors: Vince Golle, Carlos Torres

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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