Manufacturing Cools Even as U.S. Consumers Still Spend

Photographer: Ariana Lindquist/Bloomberg

Warp operator Barbara Duhme at the Faribault Woolen Mill Co. in Minnesota on April 27, 2012. Close

Warp operator Barbara Duhme at the Faribault Woolen Mill Co. in Minnesota on April 27, 2012.

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Photographer: Ariana Lindquist/Bloomberg

Warp operator Barbara Duhme at the Faribault Woolen Mill Co. in Minnesota on April 27, 2012.

Business activity in the U.S. expanded in April at the slowest pace since the end of 2009, adding to evidence that manufacturing is cooling.

The Institute for Supply Management-Chicago Inc. said today its barometer decreased to 56.2 during the month, lower than the most pessimistic forecast in a Bloomberg News survey, from 62.2 in March. Readings greater than 50 signal growth.

The pace of production eased in April, reflecting a recession in Europe and a slowdown in China that may keep holding back orders. A separate report today showed U.S. consumer spending and incomes climbed in March, indicating that household demand will help underpin the economy as long as the job market continues to heal.

“We’re likely to see manufacturing growth ease a bit,” said Peter Newland, a U.S. economist at Barclays in New York. “A gradual improvement in the labor market is going to be key for consumer spending. This is consistent with further moderate growth.”

Economists projected the purchasing managers’ gauge would fall to 60, according to the median of 55 estimates in the survey. Projections ranged from 58 to 62.9.

Household purchases, which account for about 70 percent of the economy, increased 0.3 percent in March, after a revised 0.9 percent gain the prior month that was stronger than first reported, Commerce Department figures showed. The median estimate of 72 economists surveyed by Bloomberg called for a 0.4 percent rise.

Stocks Decline

The Standard & Poor’s 500 Index (SPX) declined, halting a four-month advance, after the Chicago index and a report showing Spain’s economy entered into a recession. The S&P 500 slid 0.4 percent to 1,397.91 at the close of trading in New York. The yield on the benchmark 10-year Treasury note fell to 1.92 percent from 1.94 percent on April 27.

Spain’s economy shrank 0.3 percent in the first quarter, the same as in the previous three months, the Madrid-based National Statistics Institute said today. The contraction put the euro region’s fourth-largest economy into its second recession since 2009.

Other reports today showed Taiwan’s economy expanded at the slowest pace since 2009, Singapore’s jobless rate unexpectedly rose and growth in South Korean industrial output eased in March, underscoring the impact of Europe’s crisis on trade-reliant Asian economies.

American companies are also bracing for the impact.

Headwinds From Europe

“We continue to anticipate headwinds from continued economic uncertainty in Europe,” Juan Figuereo, chief financial officer at Atlanta-based household products maker Newell Rubbermaid Inc., said on an April 27 conference call with analysts. Still, “we are seeing continued momentum in our emerging markets.”

Caterpillar Inc., the world’s largest maker of construction and mining equipment, is among companies still seeing gains in demand. The Peoria, Illinois-based company last week raised its earnings forecast and posted first-quarter profit that topped analysts’ estimates.

Economists watch the Chicago index and regional manufacturing reports for an early reading on the national outlook. The 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.

Data from the Federal Reserve Banks of Philadelphia and New York showed manufacturing expanded at a slower pace in April.

ISM Report

The Institute for Supply Management’s national factory index probably slid to 53 in April from 53.4 the prior month, according to the median projection in a Bloomberg survey ahead of the group’s report tomorrow. As in the Chicago survey, a reading greater than 50 signals expansion.

The Chicago group’s production gauge decreased to 57.1, the weakest since September 2009, from 68.6, today’s report showed. The index of new orders dropped to 57.4, the lowest in 11 months, from 63.3. The employment measure climbed to 58.7 from 56.3 the prior month.

Income gains may help fuel demand. Today’s Commerce Department report showed incomes advanced 0.4 percent, the most in three months, and the savings rate rose.

Even with the slowdown in March, household purchases grew in the first quarter by the most in more than a year as sales climbed at car dealerships and retailers like Target Corp.

A pickup in hiring and wages is needed to maintain last quarter’s pace of spending. Hiring probably accelerated in April after the weakest gain in five months, and the jobless rate stayed at 8.2 percent, showing improvement in the labor market, economists said before reports this week.

Employment Data

Payrolls climbed by about 160,000 workers after a 120,000 gain in March, according to the median estimate in a Bloomberg survey before Labor Department data due May 4. Employers increased payrolls by 635,000 from January through March, the biggest quarterly gain since the first three months of 2006.

Unseasonably mild temperatures may have also spurred Americans to dine out and shop. The January to March period was the warmest first quarter in records going back to 1895, according to the National Oceanic and Atmospheric Administration.

Retailers posted gains in March as stores offered discounts and shoppers stocked up early on spring gear. March same-store sales at Target, the second-largest U.S. discount chain, and Gap Inc. (GPS), the biggest U.S. apparel chain, beat the average estimate of analysts. Cars sold last quarter at the fastest pace in four years, according to industry data.

To contact the reporters on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net; Shobhana Chandra at Schandra1@bloomberg.net

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

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