Manufacturing in U.S. Probably Contracted for First Time Since July 2009

U.S. manufacturing probably shrank in August for the first time in two years, raising the risk the slowing recovery may lose one of its biggest sources of strength, economists said before a report today.

The Institute for Supply Management’s manufacturing index fell to 48.5 last month from 50.9 in July, according to the median estimate of 80 economists surveyed by Bloomberg News. The dividing line between expansion and contraction is 50, a level that the gauge last fell below in July 2009.

Slower global growth, volatile financial markets and the debate over government budgets around the world have clouded the outlooks of corporations and consumers. Manufacturers like La-Z- Boy Inc. and Toro Co. (TTC) are gauging the strength of demand as unemployment holds above 9 percent and companies delay expansion plans.

“Manufacturers have taken a step back and are in kind of a wait-and-see mode right now,” said David Resler, chief economist at Nomura Securities International Inc. in New York. “Before they rush ahead or proceed with longer-range projects, they want to get a clearer assessment of where they and the rest of the world think the economy is headed.”

Figures from Europe and Asia show a global manufacturing slowdown may be unfolding. A measure of Australian manufacturing slumped in August to a more than two-year low, a gauge of the industry in China hovered near its weakest point in 29 months as exports declined, and factories in Europe contracted more than initially estimated.

Range of Estimates

The Tempe, Arizona-based group will release the U.S. ISM results at 10 a.m. today New York time. Estimates ranged from 44 to 52. A reading above 42.5 is generally consistent with an expanding overall economy, the group says.

Other reports today may show firings eased and construction picked up. A Labor Department report at 8:30 a.m. is projected to show initial claims for unemployment insurance payments dropped in the week ended Aug. 27, according to the median estimate in a Bloomberg survey. At 10 a.m., economists project the Commerce Department will report construction spending rose 0.2 percent in July.

Several regional factory surveys last month showed the industry that led the economic recovery tempered production as orders shrank. New York-area factories cut back in August for a third-straight month, and manufacturing in the Philadelphia region contracted in August by the most in more than two years.

Economy ‘Worse’

“The economy was relatively worse than we would have expected or hoped and so that puts some pressure on all the businesses,” Michael J. Hoffman, chairman and chief executive officer at Toro, said on an Aug. 18 teleconference with analysts. The Bloomington, Minnesota-based company makes lawnmowers and golf-course maintenance equipment.

Since reaching an intraday high this year on April 29, the Standard & Poor’s Supercomposite Machinery Index, which includes Toro, has declined 20 percent, compared with an 11 percent drop in the broader S&P 500.

Federal Reserve officials last month discussed a range of ways to invigorate the recovery after the U.S. economy expanded at 0.7 percent average annual pace in the first half of the year, according to Federal Open Market Committee minutes released Aug. 31. Fed Chairman Ben S. Bernanke said in an Aug. 26 speech in Jackson Hole, Wyoming, that the central bank still has tools to boost growth and that the economy will probably improve in the second half of 2011.

While a weak dollar had provided incentive for customers overseas to buy American-made goods, and raw material costs have moderated, 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.

Market Volatility

Shifting views on the economic outlook, along with the U.S. losing its AAA credit rating at S&P earlier this month, have also led to historical financial market volatility, which may prompt manufacturers to curtail output.

The S&P 500 Index (SPX) fell or rose at least 4.4 percent in each of the first four days of the week ended Aug. 12, unprecedented consecutive swings in the American stock market, according to data compiled by Birinyi Associates Inc., Bloomberg and Howard Silverblatt, senior index analyst at S&P.

“It goes without saying that the volatility pervading in the financial markets is unsettling to the consumer, and we remain cautious given the macroeconomic environment,” Kurt Darrow, president and chief executive officer at La-Z-Boy, said on an Aug. 24 teleconference with analysts. The Monroe, Michigan-based company makes residential and office upholstered furniture.

                        Bloomberg Survey

================================================================
                             Prod-  Initial Construct    ISM
                          uctivity   Claims Spending     Manu
                              QOQ%   ,000’s     MOM%    Index
==============================================================
Date of Release              09/01    09/01    09/01    09/01
Observation Period            2Q F   27-Aug     July     Aug.
--------------------------------------------------------------
Median                       -0.5%      410     0.2%     48.5
Average                      -0.5%      408     0.1%     48.6
High Forecast                -0.1%      420     1.0%     52.0
Low Forecast                 -1.0%      400    -0.4%     44.0
Number of Participants          47       46       48       80
Previous                     -0.3%      417     0.2%     50.9
--------------------------------------------------------------
4CAST Ltd.                    ---       405    -0.4%     49.0
ABN Amro Inc.                 ---       405     ---      49.0
Action Economics             -0.7%      405     0.2%     50.0
Aletti Gestielle SGR         -0.9%      415     ---      48.0
Ameriprise Financial Inc     -0.5%      405     0.1%     49.0
Banesto                       ---      ---      0.2%     49.4
Bank of Tokyo- Mitsubishi     ---       407     ---      49.5
Bantleon Bank AG              ---      ---      ---      49.5
Barclays Capital             -0.7%      405     0.2%     48.0
Bayerische Landesbank         ---      ---      ---      48.0
BBVA                         -0.1%      415    -0.1%     50.0
BMO Capital Markets          -0.5%      408     0.2%     48.0
BNP Paribas                  -0.5%      420     0.1%     48.5
BofA Merrill Lynch Research  -1.0%      405     0.1%     48.0
Briefing.com                 -0.4%      405    -0.3%     47.0
Capital Economics            -0.5%     ---     -0.1%     47.5
CIBC World Markets            ---      ---      0.2%     48.8
Citi                         -0.7%      410     0.2%     50.0
ClearView Economics          -0.5%     ---      0.0%     48.5
Comerica Inc                 -0.4%     ---      0.3%     52.0
Commerzbank AG                ---       410     ---      48.0
Credit Agricole CIB           ---      ---      ---      49.0
Credit Suisse                 ---       410     ---      48.5
DekaBank                     -0.5%     ---      0.3%     49.0
Desjardins Group             -0.7%      410     0.2%     47.5
Deutsche Bank Securities     -0.3%      410     0.2%     49.0
Deutsche Postbank AG          ---      ---      ---      49.0
DZ Bank                      -0.5%     ---      ---      47.0
Exane                         ---      ---      ---      47.0
Fact & Opinion Economics     -0.5%      410     0.2%     48.5
First Trust Advisors         -0.5%      405     0.1%     49.9
FTN Financial                -0.5%     ---      ---      48.9
Goldman, Sachs & Co.         -0.7%     ---      0.5%     48.5
Helaba                        ---       410     ---      48.0
High Frequency Economics     -0.8%      410     0.0%     48.0
HSBC Markets                  ---       415     0.4%     47.0
Hugh Johnson Advisors         ---      ---      ---      52.0
IDEAglobal                   -0.5%      405     0.3%     48.0
IHS Global Insight           -0.4%     ---      0.3%     47.0
Informa Global Markets       -0.5%      412    -0.2%     49.0
ING Financial Markets        -0.4%      400     0.2%     47.0
Intesa-SanPaulo               ---      ---      0.2%     49.0
J.P. Morgan Chase            -0.7%      410     0.1%     48.5
Janney Montgomery Scott       ---      ---      ---      51.9
Jefferies & Co.               ---       400     0.2%     48.5
Landesbank Berlin             ---       410     0.6%     48.0
Landesbank BW                 ---      ---      ---      48.0
Maria Fiorini Ramirez Inc    -0.5%      400     ---      49.0
Market Securities            -0.7%     ---      ---      47.9
MET Capital Advisors          ---      ---      ---      49.0
MF Global                    -0.8%      410     0.3%     49.5
Mizuho Securities            -0.2%      420     0.0%     50.0
Moody’s Analytics            -0.7%      415    -0.3%     49.7
Morgan Keegan & Co.           ---      ---      0.1%     ---
Morgan Stanley & Co.          ---      ---      0.3%     48.0
National Bank Financial       ---      ---      ---      44.0
Natixis                       ---      ---      ---      48.0
Nomura Securities Intl.      -0.4%     ---      ---      47.3
Nord/LB                      -0.4%      410     ---      46.5
OSK Group/DMG                 ---      ---      ---      48.2
Parthenon Group              -0.2%      406    -0.3%     48.2
Pierpont Securities LLC      -0.7%      400     ---      50.0
PNC Bank                      ---      ---      0.3%     47.0
Prestige Economics            ---      ---      ---      49.0
Raiffeisenbank International -0.5%     ---      ---      48.5
Raymond James                -0.6%      410    -0.2%     48.5
RBC Capital Markets           ---      ---      ---      47.2
RBS Securities Inc.           ---       400     ---      49.0
Scotia Capital                ---       405     ---      48.0
SMBC Nikko Securities        -0.2%     ---      0.0%     50.0
Societe Generale              ---       403     1.0%     49.5
Standard Chartered            ---       408     ---      48.0
State Street Global Market   -0.7%      411     0.2%     48.7
Stone & McCarthy Research    -0.7%      413     0.0%     47.7
TD Securities                -0.5%      410     ---      49.0
UBS                          -0.4%      400     0.0%     50.0
UniCredit Research            ---      ---      ---      47.5
Wells Fargo & Co.            -0.5%     ---      0.2%     49.1
WestLB AG                    -0.5%     ---      0.1%     49.5
Westpac Banking Co.          -0.4%      410     0.0%     48.0
Wrightson ICAP               -0.7%      415     0.1%     50.0
==============================================================

To contact the reporter on this story: Alexander Kowalski in Washington at akowalski13@bloomberg.net

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

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