Manufacturing in U.S. Probably Cooled on Less Capital Spending
Manufacturing in the U.S. probably expanded in October at a slower pace, indicating the industry is providing little thrust for the expansion, economists said before a report today.
The Institute for Supply Management’s factory index was little changed at 51 last month from 51.5 in September, according to the median estimate of 88 economists surveyed by Bloomberg. A reading of 50 is the dividing line between expansion and contraction. Construction spending rebounded in September, another report today may show.
Factories are receiving fewer orders as companies curb investing in new equipment ahead of $607 billion in government spending cuts and tax increases that may kick in next year. While manufacturers such as Cummins Inc. (CMI) are feeling the effects of that so-called fiscal cliff, they are also struggling with a weaker global economy that’s reduced demand for U.S. exports.
“Companies still lack confidence in the recovery,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. “As long as that’s the case, you’re not going to invest in capital expenditures and you’re not going to invest in human resources.”
The Tempe, Arizona-based ISM will release the manufacturing report at 10 a.m. New York time. Economists’ estimates range from 49.2 to 52.5. The group has said that a reading above 42.5 generally is consistent with an expanding overall economy. The gauge averaged 55.2 in 2011 and 57.3 a year earlier.
Some regional data on manufacturing, which accounts for about 12 percent of the economy, have also signaled weakness.
The MNI Chicago Report’s business activity gauge unexpectedly contracted in October for a second month. In the New York area, manufacturing shrank for a third straight period as shipments and employment declined. In the Philadelphia region, manufacturing expanded for the first time in six months.
Shares of manufacturers have trailed the broader market. The Standard & Poor’s Supercomposite Industrial Machinery Index has advanced 9 percent this year, compared with a 12.3 percent gain in the broader S&P 500.
The global economy is struggling. The euro-area jobless rate climbed to a record in September as the debt crisis eroded investor and business confidence. Unemployment in the 17-nation region rose to 11.6 percent, the highest since the data series started in 1995, from 11.5 percent in August, the Luxembourg- based European Union statistics office reported yesterday.
The debt crisis has pushed at least five euro nations into recessions, forcing companies to cut costs to help weather the turmoil. Economic confidence in the region fell in October.
“Clearly we are experiencing significantly weaker demand in many of our largest markets,” Thomas Linebarger, chairman and chief executive officer at Cummins, said on a conference call yesterday. Columbus, Indiana-based Cummins is a maker of heavy-truck engines. “Unfortunately, there is also a high degree of uncertainty about the direction of the global economy, and at this point in time, it is not clear when demand will improve.”
American companies are also concerned about the economic implications of the fiscal cliff, which will be reached in January unless Congress acts to avoid it.
“The industry is experiencing slower-than-expected new order rates,” Linebarger said. “End users are reluctant to proceed with new purchases, uncertainty about the U.S. economy and concerns about possible impacts from the fiscal cliff.”
At the same time, a rebounding housing market is helping sustain the expansion in the world’s largest economy. Confidence among U.S. homebuilders in October climbed for a sixth month. The National Association of Home Builders/Wells Fargo builder sentiment index increased to 41, the highest since June 2006, from 40 in September, according to figures from the Washington- based group.
Economists project a Commerce Department report today at 10 a.m. will show construction spending climbed 0.7 percent in September after a 0.6 percent decrease.
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