U.S. Economy: Factories, Employers Pull Back as Costs Climb

Manufacturing in the U.S. grew at the slowest pace in a more than a year and employers added fewer jobs than forecast, sending share prices lower on concern a slowdown in the world’s largest economy will extend into the second quarter.

The Institute for Supply Management’s factory index fell more than projected to 53.5 last month, the lowest level since September 2009, from 60.4 in April, the Tempe, Arizona-based group said today. Companies added 38,000 workers to payrolls, the fewest since September, according to ADP Employer Services.

Yields on benchmark 10-year Treasuries fell below 3 percent for the first time this year as the reports, combined with recent data showing weakness in consumer and business spending, indicated the economy is struggling. Today’s data support Federal Reserve policy makers who’ve argued that the economy remains too fragile to withdraw stimulus.

“It’s a confluence of headwinds hitting the economy,” said Carl Riccadonna, a senior economist at Deutsche Bank Securities Inc. in New York, citing a jump in gasoline prices and risks posed by the European debt crisis. “In this recovery, the pace of economic activity is slower, and that makes the economy more vulnerable to these types of headwinds.”

Oil near $100 a barrel and disruptions to parts supplies caused by the earthquake and tsunami in Japan are weighing on the expansion globally, other reports today indicated. A purchasing managers’ index for China showed the slowest pace of expansion in nine months, while the equivalent measure for the euro area fell to a seven-month low.

Shares Drop

The Standard & Poor’s 500 Index dropped 2.3 percent to 1,314.55 at the 4 p.m. close in New York. Benchmark 10-year note yields dropped 11 basis points, or 0.11 percentage point, to 2.95 percent, the lowest since Dec. 7.

The reports prompted some economists to cut their forecasts for payrolls to be reported in two days by the Labor Department. Goldman Sachs Group Inc. reduced its estimate to a gain of 100,000 from 150,000; Deutsche Bank Securities Inc. to 160,000 from 225,000; and Bank of America Merrill Lynch to 125,000 from 165,000.

Economists at JPMorgan Chase & Co. in New York also cut second-quarter growth forecasts for the second time in as many weeks. The world’s largest economy will expand at a 2 percent annual rate from April through June, down from a prior estimate of 2.5 percent, according to an e-mailed statement from Michael Feroli, the bank’s chief U.S. economist.

Auto Sales

One reason for the reduction was a slump in auto sales last month that in part reflected decreased inventories following the March 11 earthquake in Japan. Cars and light trucks sold at an 11.8 million annual rate last month, down 11 percent from April and the fewest since September, industry data today showed.

Economists projected the ISM gauge would drop to 57.1, according to the median forecast in a Bloomberg News survey. Estimates of the 83 economists ranged from 53 to 60. The measure’s 6.9-point drop was the biggest one-month decline since January 1984.

The group’s production, orders, backlogs and inventory indexes all fell.

Manufacturing, which has been benefiting from a pickup in exports to countries like China and Brazil, began to cool in the aftermath of Japan’s earthquake in March. Industrial production stalled in April as disruptions related to Japan’s crisis led to a plunge in U.S. auto output, a Federal Reserve report showed May 17.

August Rebound

Honda Motor Co., Japan’s third-largest carmaker, said its North America and China vehicle production will return to normal in August as parts suppliers recover from Japan’s record earthquake.

In the U.S., production of Honda’s Civic small cars will continue to be slowed by limited supplies of some parts, the Tokyo-based company said in a statement May 26. Production of the 2012 Civic, which went on sale in April, will be at about 50 percent, it said.

“The light at the end of the tunnel is glowing brighter for us, represented by this significant improvement in our production situation,” John Mendel, executive vice president of U.S. sales, said in the statement.

Global Demand

Moline, Illinois-based Deere & Co. (DE), the world’s largest maker of farm equipment, said on May 18 that earnings will be $2.65 billion in the fiscal year through October, more than the $2.5 billion forecast in February.

The manufacturer’s forecast includes a negative impact of about $300 million in sales and $70 million in operating profit because of disruptions from Japan. Global demand for agriculture and construction equipment will drive profits, the company said.

The U.S. economy began 2011 on a weaker note, growing at a 1.8 percent annual rate in the first three months of this year after expanding at a 3.1 percent pace in the fourth quarter, according to Commerce Department figures.

The slowdown will “probably prove temporary,” with manufacturing data and financial markets improving, Federal Reserve Bank of New York President William C. Dudley said during a May 6 press conference.

Dudley said he expects the impact of rising commodity prices on inflation to be “transitory.”

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