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Manufacturing in U.S. Unexpectedly Contracted in June

Monday, 02 Jul 2012 11:04 AM

Manufacturing in the U.S. unexpectedly contracted in June for the first time in almost three years, indicating a mainstay of the U.S. 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.

Editor’s Note: Economist Unapologetically Calls Out Bernanke, Obama For Mishandling Economy. See What They Did.

Assembly lines may be slowing as consumers temper purchases of vehicles and other goods and companies limit investments in new equipment. At the same time, export markets for manufacturers like DuPont Co. and Steelcase Inc. are finding it more difficult as Europe struggles with a debt crisis and Asian economies including China weaken.

“The investment picture is softening in the face of all the uncertainty,” Michael Hanson, a senior U.S. economist at Bank of America Corp. in New York, said before the report. “Europe is already weighing on the manufacturing sector, and U.S. growth is decelerating.”

Stocks fell, following the biggest June rally since 1999 from the Standard & Poor’s 500 Index, and the ISM index fell to the lowest level since July 2009. The S&P 500 declined 0.3 percent to 1,357.66 at 10:21 a.m. in New York.

The median forecast in the Bloomberg survey called for a decline to 52. Estimates of 70 economists ranged from 50.5 to 53.5. The gauge averaged 55.2 in 2011 and 57.3 in the previous year.

While an index below 50 indicates contraction in the industry, a reading greater than 42.6 generally indicates the economy as a whole is expanding, according to ISM.

Manufacturing is 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.

Euro-area unemployment reached the highest on record in May, other figures showed. The jobless rate in the 17-nation area 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.

New Orders

The ISM’s U.S. production index decreased to 51, the lowest since May 2009, from 55.6. The new orders measure dropped to 47.8, the weakest since April 2009, from 60.1, and the gauge of export orders declined to 47.5 from 53.5.

The slump in orders from the previous month was biggest since October 2001, after the September 11 terrorist attacks.

The employment gauge decreased to 56.6 from 56.9 in the prior month.

The measure of orders waiting to be filled fell to 44.5 from 47. The inventory index dropped to 44 from 46, while a gauge of customer stockpiles rose to 48.5 from 43.5. A figure less than 50 means manufacturers are reducing stockpiles.

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 in June 2009.

The latest regional reports reinforce a recent slowdown in the industry. Manufacturing in the Philadelphia area shrank in June at the fastest pace in almost a year, while New York-region factories expanded at the slowest rate in seven months.

A Commerce Department report on durables orders last week showed demand for non-defense capital goods excluding aircraft climbed 1.6 percent in May after a 1.4 percent decrease, helping allay concern that business spending will falter.

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.

Europe also remains a concern for manufacturers. An index of executive and consumer sentiment in the euro area slumped in June to the lowest since October 2009, adding to signs the economy fell back into a recession, figures showed last week.

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, 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.

Editor’s Note: Economist Unapologetically Calls Out Bernanke, Obama For Mishandling Economy. See What They Did.

“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.”

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