Factories Meet New Hurdle in U.S. Consumer Spending Slowdown

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U.S. Manufacturing Expands More Than Forecast in May

After weathering a slump in exports and oil exploration, American manufacturers confront a new hurdle: a hesitant consumer.

While the Institute for Supply Management’s factory index climbed in May from an almost two-year low, another release from the Commerce Department showed little change in April personal spending, getting the second quarter off to a slow start.

Households remain intent on rebuilding finances six years into the economic expansion even as the job market strengthens, which means manufacturing will take time to rebound from the strong dollar and plunge in oil prices. Another report showing a burst of construction activity in April indicates residential and commercial builders can look forward to better times ahead.

“Manufacturing is starting to rev up a little bit again,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York. Still, “it’s hard to see manufacturing improving if consumer spending is really as weak as the April numbers imply.”

The ISM’s gauge of factories improved to 52.8 last month from 51.5 in April as orders increased at the fastest pace in five months, the Tempe, Arizona-based group said Monday. Readings above 50 indicate expansion and the May figure exceeded the Bloomberg survey median forecast of 52.

“It’s nothing to write home about yet, but we’re moving in the right direction,” Bradley Holcomb, chairman of the ISM Manufacturing Business Survey Committee, said on a conference call. “We’re still slugging away here.”

Unfilled Orders

The pickup in bookings and the strongest reading for order backlogs since November point to production gains that will probably help the U.S. bounce back after contracting last quarter. The unchanged reading in April personal spending followed a 0.5 percent gain in March, the Commerce Department said.

At the same time, incomes advanced 0.4 percent in May and the saving rate rose to 5.6 percent from 5.2 percent.

“Consumer spending remains a bit restrained,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit and among the top forecasters of spending in the past two years, according to data compiled by Bloomberg. “It suggests a weak start to the quarter and puts growth estimates at risk. I still think things will improve. We’re going to gain some momentum. All the fundamentals are in place for it.”

Disposable income, or the money left over after taxes, rose 0.3 percent after adjusting for inflation. It fell 0.2 percent in the prior month. Wages and salaries climbed 0.2 percent.

Stocks Fluctuate

Stocks advanced, after equities posted their worst week in six, as the manufacturing data helped allay concerns that an economic slump will continue past the first quarter. The Standard & Poor’s 500 Index rose 0.2 percent to 2,111.73 at the close in New York.

While the stop-and-go nature of consumer spending remains a hurdle for the nation’s factories and economy, builders are busier. Construction outlays climbed 2.2 percent in April, the most since May 2012 and the third monthly gain, according to the Commerce Department.

Spending for nonresidential projects, including hotels, office buildings and health care facilities, advanced 3.2 percent, the most since June 2011.

Two months of improved business investment and the end of a labor dispute at West Coast ports are also allowing manufacturing to stabilize.

Fourteen of 18 U.S. manufacturing industries expanded in May, including producers of plastics, electrical equipment and appliances, according to the ISM. Makers of textiles and computer and electronic products were the two industries that said business contracted.

European Manufacturing

In parts of Europe, manufacturing also grew more than forecast in May as the weaker euro helped drive exports. Markit Economics said its gauge for Italy climbed to 54.8, the highest level since 2011, while the Spanish measure jumped to 55.8. Markit’s factory PMI for the entire 19-nation euro region matched the strongest reading since May 2014.

For U.S. producers, exports were stagnant in May, according to the ISM, and respondents continued to mention the challenge to overseas sales posed by the stronger dollar.

A swelling trade gap in the first quarter subtracted the most from gross domestic product in 30 years as the appreciating dollar caused exports to slump. The deficit cut 1.9 percentage points from growth, the most since 1985.

GDP, the volume of all goods and services produced in the U.S., shrank at a 0.7 percent annualized rate, revised from a previously reported 0.2 percent gain, according to Commerce Department figures issued Friday in Washington.

Recent figures showing a pickup in the housing market help explain why Deere & Co., the largest maker of farm equipment, forecast on May 22 better-than-expected profit for fiscal 2015. The Moline, Illinois-based company said improvements in U.S. building activity spurred demand for its construction equipment.

More factories also said they were expanding headcounts, with the ISM’s gauge of employment climbing.

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