U.S. Business Activity Falls Less Than Estimated, ISM-Chicago Index Shows

Business activity in the U.S. expanded in August at a faster pace than forecast, allaying concern that manufacturing was slumping.

The Institute for Supply Management-Chicago Inc. said today its business barometer fell to 56.5 this month, exceeding the highest estimate of 51 economists surveyed by Bloomberg News, from 58.8 in July. A level of 50 is the dividing line between expansion and contraction. Another report showed companies added fewer workers to payrolls in August.

Cheaper raw materials and the unwinding of auto-supply disruptions related to Japan’s natural disaster have helped manufacturers expand even as global demand for U.S.-made goods slows. The report was in contrast to regional readings from Philadelphia and New York earlier this month that showed factories pulled back as stocks plunged on growing concern over the European credit crisis and the U.S. debt downgrade.

“The softening in manufacturing that we’ve seen occur in the last month or two is certainly not as drastic as was feared,” said Omair Sharif, an economist at RBS Securities LLC in Stamford, Connecticut. “The Chicago area is being held up to some degree by the recovery in the auto sector.”

Stocks added to earlier gains after the report. The Standard & Poor’s 500 Index rose 1.1 percent to 1,226.03 at 10:50 a.m. in New York. Treasury securities were little changed with the yield on the benchmark 10-year note at 2.19 percent compared with 2.18 percent late yesterday.

Survey Results

Economists forecast the Chicago gauge would drop to 53.3, according to the median estimate in a Bloomberg News survey. Projections for the Chicago index from the 51 economists surveyed ranged from 49 to 56.1. The August reading was the lowest since November 2009.

Another report today showed companies added 91,000 workers to payrolls in August, the fewest in three months, according to data from ADP Employer Services. The increase followed a revised 109,000 gain the prior month.

“The labor market has held up better through this period than some had feared, but there is no question it remains sluggish,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, who forecast a gain of 90,000. “We are still in a period of weak employment conditions that could weaken a bit further.”

Also today, the Commerce Department reported that orders placed with factories rose in July by the most in four months, boosted by demand for motor vehicles and aircraft that more than made up for a decrease in business equipment.

More Orders

The 2.4 percent increase in bookings exceeded the median forecast of economists in a Bloomberg survey and followed a revised 0.4 percent drop in the prior month.

The downgrade of U.S. debt by S&P and fears that one or more of the countries in the euro zone will default triggered a plunge in stocks earlier this month that caused consumer confidence to sink. That raised concerns that companies will also pull back, hurting an already slowing U.S. economy.

The Chicago group’s production gauge decreased to 57.8 from July’s reading of 64.3. The gauge of new orders fell to 56.9 from 59.4. The employment measure climbed to 52.1 from 51.5 the prior month.

Economists watch the Chicago index and other regional manufacturing reports for an early reading on the national outlook. The Chicago group says its membership includes both manufacturers and service providers with operations in the U.S. and abroad, making the gauge a measure of overall growth.

National Data

The ISM’s national factory index shrank in August for the first time since July 2009, according to the median projection in a Bloomberg survey ahead of tomorrow’s report. Economists forecast the gauge slid to 48.5 from 50.9 in July. Like the Chicago survey, a reading greater than 50 signals expansion.

Other regional surveys released this month showed factories were scaling back as orders plummeted. Manufacturing in the Philadelphia region contracted in August by the most in more than two years, and New York-area factories cut back in August for a third-straight month.

While a weak dollar had provided incentive for overseas nations to buy American-made goods, 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.

“There is some uncertainty, so there’s probably been some ratcheting down of expectations and concern about not building products that wouldn’t sell,” Martin Slark, vice chairman and chief executive officer at Molex Inc. (MOLX), said in an Aug. 3 call with analysts. “We believe that this is more of a temporary slowdown rather than major correction, but I think our external economic factors are going to drive that.”

To gauge the duration of the slowdown, Slark said the Lisle, Illinois-based maker of electronic components for automobiles and computers will need to wait until September to see “what happens with bookings then or what’s happening to the sort of macroeconomic environment at that time.”

To contact the reporters on this story: Alexander 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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U.S. Economy: Businesses Expanded More Than Forecast in Augu

David Paul Morris/Bloomberg

An employee of SunPower Corp. checks assembled solar panels at the SunPower Corp. module manufacturing plant at Flextronics in Milpitas, California, on Aug. 24, 2011.

An employee of SunPower Corp. checks assembled solar panels at the SunPower Corp. module manufacturing plant at Flextronics in Milpitas, California, on Aug. 24, 2011. Photographer: David Paul Morris/Bloomberg

11:14

Aug. 31 (Bloomberg) -- Carl Riccadonna, senior U.S. economist at Deutsche Bank Securities Inc., talks about the outlook for the U.S. economy. Riccadonna also discusses the U.S. labor market and manufacturing, and Federal Reserve monetary policy. He speaks with Tom Keene and Michael McKee on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)

4:48

Aug. 31 (Bloomberg) -- Hugh Johnson, chairman of Hugh Johnson Advisors LLC, talks about ADP Employer Services' U.S. jobs data for August and the outlook for the economy and stock market. Companies in the U.S. added 91,000 workers to payrolls, according to data from ADP. Johnson speaks with Betty Liu, Dominic Chu and Jon Erlichman on Bloomberg Television's "In the Loop." (Source: Bloomberg)