http://www.businessweek.com/news/2012-07-02/manufacturing-in-u-dot-s-dot-unexpectedly-contracted-in-june-economy

Bloomberg News

Manufacturing in U.S. Unexpectedly Contracted in June

July 02, 2012

ISM Index of U.S. Manufacturing Decreased to 49.7 in June

An employee welds an aluminum seal to the casing for a security camera at Memac Industries Inc. in Lancaster, Ohio. The ISM index fell from 53.5 a month earlier. Photographer: Ty Wright/Bloomberg

Manufacturing in the U.S. unexpectedly shrank in June for the first time since the economy emerged from the recession three years ago, indicating a mainstay of the expansion may be faltering.

The Institute for Supply Management’s index fell to 49.7, worse than the most-pessimistic forecast in a Bloomberg News survey, from 53.5 in May, the Tempe, Arizona-based group’s report showed today. Figures less than 50 signal contraction. Measures of orders, production and export demand dropped to three-year lows.

Treasury yields fell on concern Europe’s debt crisis and a slowdown in Asia are taking a bigger toll on the world’s largest economy and hurting manufacturers like DuPont Co. (DD:US) and Steelcase Inc. (SCS:US) Assembly lines are at risk of slowing further as consumers temper purchases and companies cut back on investment.

“Manufacturing is gearing down,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York, whose 50.5 forecast was the lowest in the Bloomberg survey. “It’s consistent with the idea that the uncertainty is weighing on businesses. Europe is taking a bite out of the export sector.”

The yield on the benchmark 10-year Treasury note declined to 1.59 percent from 1.65 percent on June 29. The Standard & Poor’s 500 Index erased earlier losses after last week capping its best June rally since 1999. The S&P 500 climbed 0.3 percent to 1,365.51 at the close in New York.

The ISM index, which dropped to its lowest level since July 2009, was less than the median forecast of 52 in the Bloomberg survey. Estimates of 70 economists ranged from 50.5 to 53.5. The gauge averaged 55.2 in 2011 and 57.3 the prior year.

No Recession

Today’s reading is well above the 42.6 level that generally indicates the economy as a whole is expanding, according to ISM.

“We are not yet in recession territory,” Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, said in an e-mail to clients. “Recessions are usually accompanied by ISM readings in the low-40s. And the construction news is improving, while consumers are being helped by tumbling gasoline prices.”

A separate report today from the Commerce Department in Washington showed the improvement in the housing market helped boost construction spending in May to the highest level in two years. Housing demand has shown a gradual recovery. Purchases of new houses rose 7.6 percent in May to reach the highest level since April 2010, recent data showed.

Manufacturing is also weaker in the rest of the world. The industry in the euro-area contracted for an 11th straight month in June as Europe’s debt crisis sapped demand. A measure of the region’s factories held at 45.1, London-based Markit Economics said.

Europe’s Economy

Euro-area unemployment reached the highest on record in May, other figures showed. The jobless rate in the 17-nation region rose to 11.1 percent, the highest since the data series began in 1995, from 11 percent a month earlier, the European Union’s statistics office in Luxembourg said.

A manufacturing purchasing managers’ index for China fell to 48.2 in June from 48.4 a month earlier, HSBC Holdings Plc and Markit said today.

The ISM’s U.S. production index decreased to 51, the lowest since May 2009. The new orders measure dropped to 47.8, the weakest since April 2009, from 60.1. The drop in demand from the previous month was biggest since October 2001, after the September 11 terrorist attacks.

The employment gauge decreased to a three-month low. The index of prices paid decreased to 37 from 47.5.

Manufacturing accounts for about 12 percent of the economy and has been at the forefront of the recovery that began June 2009.

Jobless Rate

Slower hiring and an unemployment rate exceeding 8 percent may keep restraining household spending, which accounts for about 70 percent of the economy. Cars and light trucks sold at a 13.7 million annual rate in May, the weakest this year and down from April’s 14.4 million pace, Ward’s Automotive Group data showed.

Executives at Wilmington, Delaware-based DuPont said while growth in North America is holding up, the third-largest U.S. chemical maker is concerned about a slowdown in China and Germany’s dependence on exports.

“My number one worry is what will happen in Europe over the next six to nine months,” Diane Gulyas, group vice president of DuPont’s performance-materials segment, said on a conference call with analysts on June 14.

Steelcase Sales

Steelcase, a Grand Rapids, Michigan-based maker of office furniture, said first-quarter sales fell in most major markets in the region that includes Europe, Middle East and Africa.

“Uncertainty in the global economy continues to take its toll on specific parts of our business,” Chief Financial Officer David Sylvester said on a conference call on June 21.

The U.S. economy expanded 1.9 percent in the first quarter, the same as previously estimated and following a 3 percent pace in the prior three months, revised data showed last week.

To combat flagging growth, Federal Reserve policy makers said they are ready to take more steps should the U.S. expansion slacken.

Fed officials said in a policy statement on June 20 that they expect “economic growth to remain moderate over coming quarters and then to pick up very gradually.”

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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


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