American Factories Take Step Back at Start of Third Quarter

America’s factories took a step back in July, a sign the world’s largest economy was off to an uninspiring start in the third quarter.

The Institute for Supply Management’s index of manufacturing dropped to a three-month low of 52.7, according to figures Monday from the Tempe, Arizona-based group. Another report from the Commerce Department showed personal consumption rose 0.2 percent in June after a 0.7 percent gain that was less than previously estimated.

“Manufacturing is muddling along,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. “The economy will continue putting in a moderate growth performance in the second half.”

Meager wage gains and a desire to limit debt are making households less inclined to splurge, an added challenge for U.S. factories contending with weak overseas demand. Other data showing a burst of construction activity in the second quarter indicate builders have emerged as a source of strength for the economy.

While less than forecast, a 0.1 percent increase in June outlays for construction projects followed big upward revisions to the previous two months, according to the Commerce Department. May spending was revised to a 1.8 percent gain from 0.8 percent, while April outlays jumped 3.8 percent after a previous estimate of 2.1 percent.

Second Quarter

After the construction spending release, economists at JPMorgan, Morgan Stanley, BNP, Barclays Plc, Oxford Economics USA Inc. and Macroeconomic Advisers LLC raised their tracking estimates for second-quarter economic growth to 2.7 percent. Gross domestic product rose 2.3 percent during the period, the Commerce Department said last week.

The median projection in a Bloomberg survey of economists called for the ISM’s manufacturing gauge to hold at the June reading of 53.5. Measures above 50 signal expansion. While the group’s index of order backlogs was the weakest since November 2012, new bookings were the strongest this year and production improved.

Without a pickup in overseas markets and a rebound in business investment, a faster pace of U.S. manufacturing may prove difficult to achieve.

Bradley Holcomb, chairman of the ISM factory survey, said on a conference call with reporters that the report showed “mixed” responses from businesses. Stronger orders and production were interlaced with concerns such as the drop in oil prices and global markets.

‘Slow Start’

“This is a slow start” to the second half of 2015, he said. Nevertheless, the industry is growing and it’s important to “take this month by month.”

The group’s factory employment index declined and the measure of export demand contracted for a second month.

Eleven of 18 industries surveyed by the purchasing managers’ group posted growth, led by producers of textiles, paper products and apparel.

Other reports indicate business investment is stabilizing, while automobile demand remains a source of strength. June sales of cars and light trucks capped the strongest quarter since 2005, according to figures from Ward’s Automotive Group.

Purchases in July outpaced analysts’ estimates as buyers snapped up more pickups and SUVs, taking advantage of cheap financing.

U.S. Dollar

The advance in the dollar since mid-2014 has taken a toll on exports. The greenback remains elevated in part as investors project the Federal Reserve is on track to raise interest rates by year-end.

Industrial companies such as Caterpillar Inc. and 3M Co. are hurting because of weak global markets and the U.S. currency’s appreciation, even as the woes of the oil sector dissipate.

The increase in personal outlays in June matched the median forecast in a Bloomberg survey and wrapped up a stronger quarterly performance. Spending rose at a 2.9 percent annualized rate from April through June, up from a 1.8 percent pace in the first three months of the year and higher than the 2 percent average from 2010 through 2014.

Household purchases after adjusting for inflation were little changed in June after rising 0.4 percent in May, the Commerce Department’s report showed.

The data indicate stronger wage growth is probably needed to convince more consumers to open their wallets with greater frequency and allow the economy to build momentum. Worker pay, excluding bonuses, rose 0.2 percent in June after a 0.4 percent gain a month earlier.

Disposable Income

The Commerce Department’s report on Monday also showed incomes increased 0.4 percent for a third month. Disposable income, or the money remaining after taxes, rose 0.2 percent in June from the prior month after adjusting for inflation.

“Wage growth is still a bit of an issue -- you’re really not seeing a whole lot of acceleration,” said Gennadiy Goldberg, a U.S. strategist at TD Securities LLC in New York, who correctly projected the rise in consumer purchases. While the June figures show “a little bit weaker hand-off into the third quarter,” he said, “overall, we’re chugging along pretty decently here.”

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