Bloomberg News

U.S. Economy: Surprise Factory Growth Eases Recession Worry

September 01, 2011

(Updates with closing share prices in sixth paragraph.)

Sept. 1 (Bloomberg) -- Manufacturing in the U.S. unexpectedly expanded in August, allaying concern the world’s largest economy is headed for another recession.

The Institute for Supply Management’s factory index fell to 50.6 last month from 50.9 in July, the Tempe, Arizona-based group said today. Figures greater than 50 signal expansion. Economists projected the gauge would drop to 48.5, according to the median forecast in a Bloomberg News survey.

Receding commodity prices and a recovery from setbacks related to Japan’s natural disaster have helped keep U.S. manufacturing from shrinking amid a global slowdown that’s curbing overseas demand. Another report today showed consumer sentiment declined to the second-lowest level in two years, posing a threat to the household spending that accounts for 70 percent of the economy.

The manufacturing report is “one vote for dodging the recession bullet, but we have to balance that on some of the other votes coming in, most notably the bottom dropping out of consumer confidence in August,” said Robert Dye, chief economist at Comerica Inc. in Dallas, one of three economists in a Bloomberg News survey to predict last month’s expansion. “My baseline forecast is for weak to moderate growth.”

The dollar rallied, Treasuries rose and U.S. stocks swung between gains and losses, as the manufacturing report bolstered optimism in the economy while dimming prospects for more monetary stimulus from the Federal Reserve.

Shares Fall

The Dollar Index, a gauge of the currency against six major peers, increased 0.5 percent to 74.484 at 4:11 p.m. in New York. The Standard & Poor’s 500 Index fell 1.2 percent to 1,204.42 at the 4 p.m. close in New York after rising as much as 0.9 percent. The yield on the benchmark 10-year Treasury note fell to 2.13 percent from 2.22 percent late yesterday.

Data from Europe and Asia today pointed to a global manufacturing slowdown. A gauge of the industry in China hovered near its weakest point in 29 months as exports declined, and factories in Europe contracted more than initially estimated.

“The fact that we remain in positive territory is pretty remarkable and it shows the broader resilience across the country,” Bradley Holcomb, chairman of the ISM’s factory survey, said in a conference call with reporters. “We’re going to have to see which direction this wants to go, and it’s going to depend on news from Washington and from the economy over the next few weeks.”

The ISM report showed orders shrank for a second month, production contracted for the first time since May 2009 and export bookings grew at the slowest pace since July 2009.

Confidence Hurt

Corporate and consumer confidence has been hurt by political squabbling over lifting the nation’s debt limit and the subsequent cut to the U.S. credit rating by Standard & Poor’s, which roiled equity markets. Regional reports from Philadelphia and New York showing manufacturing contracted contributed to last month’s 5.3 percent drop in the S&P 500.

“It goes without saying that the volatility pervading in the financial markets is unsettling to the consumer, and we remain cautious given the macroeconomic environment,” Kurt Darrow, president and chief executive officer of Monroe, Michigan-based La-Z-Boy Inc., a maker of living-room recliners, said on an Aug. 24 teleconference with analysts.

The Bloomberg Consumer Comfort Index was minus 49.1 in the week to Aug. 27, compared with a minus 47 reading the previous period. The gauge dropped to a record low among the least- affluent Americans.

Auto Sales

Consumers last month were willing to purchase big-ticket items even as confidence waned. Sales at General Motors Co., Chrysler Group LLC and Nissan Motor Co. beat analysts’ estimates in August, industry data showed today.

A report from the Labor Department today showed first-time applications for jobless benefits decreased by 12,000 to 409,000 in the week ended Aug. 27 as the influence of the strike at Verizon Communications Inc. waned.

Estimates for the manufacturing index from 80 economists ranged from 44 to 52. A reading above 42.5 generally indicates an expansion in the overall economy.

Much of the gain in the overall index was driven by an increase in the inventories gauge, which climbed to 52.3 from 49.3. The employment index fell to 51.8, the lowest since November 2009, from 53.5 the prior month. The index of prices paid fell to 55.5 from 59.

Fed Discussions

Fed officials last month discussed a range of ways to invigorate the recovery after the economy expanded at a 0.7 percent average annual pace in the first half of the year, according to Federal Open Market Committee minutes released Aug. 31.

Fed Chairman Ben S. Bernanke said in an Aug. 26 speech in Jackson Hole, Wyoming, that the central bank still has tools to boost growth and that the economy will probably improve in the second half of 2011.

While a weak dollar has provided incentive for overseas customers to buy American-made goods at the same time raw material costs moderated, a slowing global economy has raised the risk export growth will cool. Additionally, a lack of jobs and weakening consumer confidence in the U.S. are reducing domestic demand.

“The economy was relatively worse than we would have expected or hoped and so that puts some pressure on all the businesses,” Michael Hoffman, chairman and chief executive officer at Toro Co., said on an Aug. 18 teleconference with analysts. The Bloomington, Minnesota-based company makes lawnmowers and golf-course maintenance equipment.

--With assistance from Chris Middleton in Washington. Editors: Vince Golle, Chris Wellisz

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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