Business Activity in U.S. Cools More Than Forecast

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Photographer: Tim Boyle/Bloomberg

Chicago's cityscape is seen from the Willis Tower.

Business activity in the U.S. cooled more than projected in June, a regional report showed, as fiscal constraints and stagnant export markets buffeted manufacturers.

The MNI Chicago Report’s business barometer dropped to 51.6 this month from 58.7 in May, which was the highest in more than a year. A reading of 50 is the dividing line between expansion and contraction. The median forecast of 56 economists surveyed by Bloomberg was 55.

The Chicago index has been out of synch with other regional factory reports, surging in May when others pointed to a slump, and dropping this month as measures from the Federal Reserve Banks of New York and Philadelphia point to a rebound. Manufacturing, which makes up about 12 percent of the economy, might be feeling the effects of federal government spending cuts that went into effect in March.

“It’s going to be an uneven path toward growth,” said Thomas Simons, money market economist at Jefferies & Co. Inc. in New York. (EMPRGBCI) “Manufacturing should gain steam in the second half” of 2013.

Economists’ forecasts for the Chicago group’s gauge ranged from 51.5 to 58.5.

Consumer sentiment held in June near an almost six-year high as Americans grew more upbeat about the economic outlook, another report today showed. The Thomson Reuters/University of Michigan final confidence index for this month eased to 84.1 from 84.5 at the end of May, which was the highest since July 2007. The median forecast in a Bloomberg survey of economists called for 83 in the gauge after a preliminary reading of 82.7.

Shares Rebound

Stocks were little changed as a rally in shares of utility, consumer and commodity companies helped pare earlier losses. The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,613.95 at 11:18 a.m. in New York.

The Chicago report’s measure of new orders declined to 54.6 after reaching a three-month high of 58.1 in May. Backlogs slumped to 38.4, the lowest level since September 2009. The decrease from the prior month’s 53.1 was the biggest decrease since March 1974. A gauge of inventories improved to 41.4 from 40.4.

A measure of production decreased to 57 from 62.7, which was its highest reading since March 2012.

Employment Improves

The employment measure climbed to 57.8, the highest since January, from 56.9, today’s report showed.

The index of prices paid rose to 59.9 in June from 55.3 a month earlier.

Defense companies, service providers and other contractors are starting to feel the effects of the federal budget cuts that began in March.

One of those companies is Herman Miller Inc., a maker of office furnishings based in Zeeland, Michigan. While North American sales grew 9 percent from a year ago, new orders dropped, Chief Executive Officer Brian Walker said.

“We again experienced relative weakness in the U.S. federal government sector this quarter, which saw sales and orders declines of approximately 12 percent from last year,” Walker said on a June 27 earnings call. “Activity levels outside of the federal government remained generally strong.”

A rebound in consumer spending last month signals households may be able to contribute more to growth in the second half of the year. Purchases rose 0.3 percent after a 0.3 percent decline in April that was the biggest since September 2009, the Commerce Department reported yesterday.

Home Prices

Rising home prices, a better job market and bigger income gains may be helping households overcome a payroll-tax increase that took effect in January.

Americans signed more existing-home contracts in May than at any time in more than six years, the National Association of Realtors reported yesterday. The growing health of the housing market is giving a lift to materials and equipment suppliers, as well as home furnishing manufacturers.

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

Other regional activity showed improvement this month. The Empire State index from the New York Fed climbed to 7.8 from minus 1.4, and the Philadelphia (OUTFGAF) Fed’s index climbed to 12.5, its highest reading since April 2011, from minus 5.2.

The ISM’s national factory index, due July 1, probably showed manufacturing eked out a gain this month after contracting in May, according to the median forecast of economists surveyed.

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net

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

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