Manufacturing in U.S. Unexpectedly Contracted in June, ISM Says

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 manufacturing 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. The median forecast in the Bloomberg survey called for a decline to 52.

Assembly lines may slow 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. (DD) and Steelcase Inc. (SCS) may be more difficult as Europe struggles with a debt crisis and some Asian economies 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.”

Estimates in the Bloomberg survey of 70 economists ranged from 50.5 to 53.5. The gauge averaged 55.2 in 2011 and 57.3 in the previous year.

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.

European Unemployment

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.

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

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

Order Backlogs

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.

Labor Market

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.

Office Furniture

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.

“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.”

To contact the reporter on this story: Shobhana Chandra in Washington at

To contact the editor responsible for this story: Christopher Wellisz at

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