Bloomberg News

U.S. Manufacturing Unexpectedly Shrinks for Second Month

August 01, 2012

ISM Index of U.S. Manufacturing Rose to 49.8 in July

The Institute for Supply Management’s factory index rose to 49.8 in July from 49.7 a month earlier, the Tempe, Arizona-based group’s report showed today. Photographer: Ty Wright/Bloomberg

American manufacturing unexpectedly contracted in July for a second month, reflecting a drop in orders that threatens to undercut a mainstay of the recovery.

The Institute for Supply Management’s factory index was 49.8 last month, little changed from a three-year low of 49.7 reached in June, the Tempe, Arizona-based group said today. Economists surveyed by Bloomberg News projected a reading of 50.2, according to the median estimate, just above the 50 mark that separates expansions and contractions.

The report showed bookings dropped for a second month, indicating Europe’s debt crisis and the looming U.S. government spending cuts and tax increases that constitute the so-called fiscal cliff are taking a toll on customers globally. Federal Reserve policy makers are meeting today to determine if the world’s largest economy needs another dose of stimulus as companies such as Cummins Inc. (CMI:US) lower sales forecasts.

“We’ve seen slower growth in emerging markets, the recession in Europe -- all of that is still ever-present,” said Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Firms are holding pat right now.”

Another report showed companies added more workers than projected in July. Payrolls climbed by 163,000 workers after a 172,000 gain the prior month, Roseland, New Jersey-based ADP Employer Services said. The median estimate of 38 economists surveyed by Bloomberg News called for an advance of 120,000.

Stocks rose, halting a two-day decline in the Standard & Poor’s 500 Index, as investors awaited the outcome of the Fed’s meeting at around 2:15 p.m. New York time. The 500 Index climbed 0.2 percent to 1,382.35 at 12:17 p.m. in Washington. Treasury securities fell, sending the yield on the benchmark 10-year note up to 1.51 percent from 1.47 percent late yesterday.

Global Slowdown

Reports elsewhere showed factories were retrenching globally.

U.K. manufacturing shrank in July the most in more than three years as export orders slumped, according to data from London-based Markit Economics. Euro-area factories contracted for a 12th month in July, according to a separate report. A gauge of manufacturing in the 17-nation region fell to a 37- month low of 44 from 45.1 in June.

China’s manufacturing teetered on the edge of contraction in July and South Korea’s exports declined, other figures showed.

Estimates for the U.S. ISM index in the Bloomberg survey of 84 economists ranged from 48.5 to 52. Manufacturing accounts for about 12 percent of the economy and has been a linchpin for the expansion that began in June 2009.

Orders Drop

The ISM’s new orders measure was little changed at 48 from 47.8 in June, the worst back-to-back readings since the economy was in the recession. Three industries in the survey reported growth in bookings, the fewest since February 2009. The group’s export gauge dropped to the lowest level since April of that year.

“It’s the new orders that is really something to watch at this point,” Brad Holcomb, chairman of the ISM survey, said on a conference call with reporters. “I would be very concerned about production staying positive.”

The ISM’s production index was little changed at 51.3 after 51 in June, while a gauge of employment decreased to 52, the lowest level since December 2009, from 56.6 in June.

Columbus, Indiana-based Cummins this week posted a second- quarter profit that exceeded analysts’ estimates. The maker of diesel and natural gas engines forecast full-year revenue of $18 billion, which would be little changed from 2011, down from an earlier projection of a 10 percent increase.

Cutting Forecasts

“Continued weakness in some international markets, particularly in Brazil and China, coupled with slowing orders in U.S. truck, oil and gas, and power generation, have caused us to lower our outlook,” Thomas Linebarger, chief executive officer, said on a conference call with analysts.

General Motors Co. and Ford Motor Co. posted unexpected declines in July auto sales compared to the same month last year, industry figures also showed today.

Fed policy makers, concluding a two-day meeting this afternoon, will probably forgo announcing a third round of large-scale asset purchases, waiting instead until September, according to median estimate of economists in a Bloomberg survey.

The Fed may take further action if the job market fails to make “sustained progress” in bringing down an unemployment rate stuck above 8 percent for 41 consecutive months, Chairman Ben S. Bernanke told Congress last month.

A Labor Department report in two days may show employment climbed by 100,000 last month after an 80,000 gain in June, according to the median estimate of economists surveyed. The jobless rate is forecast to hold at 8.2 percent.

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net

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


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