Manufacturing in U.S. Expands at Slowest Pace This YearShobhana Chandra
Manufacturing expanded in April at the slowest pace this year and companies took on the fewest workers in seven months, adding to evidence of a slowdown in the world’s largest economy.
The Institute for Supply Management’s factory index fell to 50.7 from the prior period’s 51.3, the Tempe, Arizona-based group said today. Fifty is the dividing line between growth and contraction. The ADP Research Institute said private payrolls rose 119,000 last month, the least since September, while another report showed construction outlays slumped in March.
Factories are pulling back as the need to rebuild inventories wanes, across-the-board federal budget cuts take hold and higher payroll taxes restrain consumer spending. Federal Reserve policy makers said today at the conclusion of their two-day meeting that they will continue to pursue record stimulus in an attempt to bolster the economy and job market.
“Manufacturing is stalling a bit,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York, who was the best forecaster of ISM manufacturing over the past two years, according to data compiled by Bloomberg. “Hiring has probably slowed a little. For the Fed, it’s going to be full speed ahead.”
Stocks and Treasury yields declined after the figures. The Standard & Poor’s 500 Index dropped 0.9 percent to 1,582.7 at the close in New York. The yield on the benchmark 10-year note decreased to 1.63 percent from 1.67 percent late yesterday.
Details of the ISM’s factory index showed more producers and their customers reduced inventories in April than a month earlier. Along with leaner stockpiles, increases in measures of orders, a leading indicator of demand, and production show manufacturing may avoid further deterioration.
The median forecast for the ISM factory index called for a 50.5 reading. Estimates from 84 economists in the Bloomberg survey ranged from 49 to 53.
Other figures today showed manufacturing across the globe is also struggling. In China, the world’s second-largest economy, factories expanded at a weaker pace in April. The Purchasing Managers’ Index fell to 50.6 last month from 50.9.
A U.K. factory index showed manufacturing contracted for a third month. The gauge rose to 49.8 last month from 48.6, according to Markit Economics and the Chartered Institute of Purchasing and Supply.
Tenneco Inc., a maker of diesel-exhaust filters and mufflers, is seeing a “mixed global industry environment,” according to Chief Executive Officer Gregg Sherrill. The Lake Forest, Illinois-based company expects to benefit later this year from improving light-vehicle production in North America and overseas markets including China.
“With a continued weak global market and the significant inventory destocking taking place, we anticipate production to remain at low levels in the second quarter,” Sherrill said in an earnings conference call on April 29. “However, as inventory issues are worked through, we expect to see some volume improvements in the second half of the year.”
The ISM’s inventory index decreased to a four-month low while a gauge of customer stockpiles dropped to the weakest level since November.
“Inventories are in a fine position, albeit low, and ready for a build-up,” Bradley Holcomb, chairman of the ISM’s factory survey, said today on a conference call.
The ISM’s index of U.S. employment decreased to 50.2, the lowest in five months, from 54.2.
The Roseland, New Jersey-based ADP Research Institute’s report showed the gain in April payrolls followed a revised 131,000 March increase that was smaller than initially estimated.
The Labor Department is projected to report on May 3 that employment, including government agencies, climbed 145,000 last month after an 88,000 increase in March. Factory payrolls are forecast to rise 5,000 after dropping 3,000, according to a Bloomberg survey. The jobless rate is projected to hold at 7.6 percent.
The economy’s inability to maintain a faster pace of growth and bigger employment gains explain why Fed policy makers today reiterated the need to continue record monetary stimulus. The officials have said they’ll maintain that policy until the outlook for the labor market improves “substantially.”
“Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated,” the Fed said in its statement. “Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.”
The 2.5 percent annualized pace of economic expansion in the first three months of the year may give way to weaker growth this quarter amid the lagged effect from a two percentage-point increase in the payroll tax at the start of 2013 and $85 billion in automatic budget cuts that began on March 1.
Growth will slow to a 1.5 percent pace from April through June, then strengthen to an average 2.4 percent rate in the last six months of the year, according to an April survey by Bloomberg.
Some economists reduced their tracking estimate of first-quarter growth after today’s figures on construction outlays.
Construction spending fell 1.7 percent in March, reflecting the biggest slump in government projects in 11 years, a report from the Commerce Department showed. The 4.1 percent decline in taxpayer-funded projects swamped a gain in homebuilding.
Stephen Stanley, chief economist at Pierpont Securities LLC, and Barclays Plc economists trimmed their first-quarter growth estimates to 2.3 percent.