Surprise Factory Downturn Holds Back U.S. Growth: Economy

Manufacturing in the U.S. unexpectedly shrank in May at the fastest pace in four years, showing slowdowns in business and government spending are holding back the world’s largest economy.

The Institute for Supply Management’s factory index fell to 49, the lowest reading since June 2009, from the prior month’s 50.7, the Tempe, Arizona-based group’s report showed today. Fifty is the dividing line between growth and contraction. The median forecast of 81 economists surveyed by Bloomberg was 51.

Across-the-board federal budget cuts and overseas markets that are struggling to rebound will probably continue to curb manufacturing, which accounts for about 12 percent of the economy. At the same time, demand for automobiles, gains in residential construction and lean inventories may spark a pickup in orders and production in the second half of the year.

“Manufacturing is really stymied by slow corporate spending and government spending cutbacks,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who was the only analyst in the Bloomberg survey to correctly project the drop in the index. “Manufacturing will grow at a modest pace this year” although it “is unlikely to accelerate in coming months,” LeBas said. “This is part of the slower expansion we’ll have in the second quarter.”

Estimates in the Bloomberg survey ranged from 49 to 54.

Shares Climb

Stocks rose, erasing earlier losses, after Federal Reserve Bank of Atlanta President Dennis Lockhart said central bank officials are committed to record stimulus measures. The Standard & Poor’s 500 Index climbed 0.6 percent to 1,640.42 at the close in New York after posting its first consecutive weekly losses since November.

Other reports today showed most manufacturers globally were also struggling. Figures from China indicated small factories contracted at a faster pace in May even as larger counterparts improved.

Euro-area manufacturing output shrank less than initially estimated last month. A gauge in the 17-nation euro area increased to 48.3 last month from 46.7 in April, Markit Economics said. That’s above an initial estimate of 47.8 on May 23. It’s been lower than 50 since July 2011.

The U.S. ISM index was pushed down by declines in orders and production and smaller gains in exports. The group’s employment gauge was little changed at just above the break-even level of 50.

Lockhart’s View

Lockhart said the ISM report was an example of the “very mixed” readings that indicate the economy isn’t strong enough to justify a reduction in the central bank’s bond-buying program.

“I’m not getting a clear picture of an economy that really is tracking with considerable momentum,” Lockhart said today in a Bloomberg Television interview in New York with Michael McKee.

“I’d tend to be a little more cautious, and say maybe August, September or later in the year” would be time to consider slowing purchases. “The issue can be on the table in any of those meetings.” The policy-setting Federal Open Market Committee said May 1 that it will keep buying $85 billion a month in bonds to bolster growth and cut unemployment.

Pall Corp., a producer of water-filtration and purification systems, is among manufacturers cautious about sales as global demand remains uneven.

While demand in the U.S. is holding up, “not all markets and geographies are working well,” Lawrence Kingsley, chief executive officer of the Port Washington, New York-based company, said on a May 31 earnings conference call. “The macro-environment continues to be a mixed one.”

Construction Figures

One area of the economy that remains a bright spot is residential real-estate as sales climb and encourage more homebuilding projects.

Spending on construction increased 0.4 percent in April to an $860.8 billion annualized rate, figures from the Commerce Department showed today. Outlays on private construction projects rose 1 percent in April from the month before. Government projects fell by 1.2 percent, to the lowest spending level since October 2006, after slumping in the prior month by a revised 2.9 percent.

Ten of 18 industries in the ISM factory survey grew last month, down from 14 in April, according to today’s report. Some of those contracting included larger groups including chemicals and transportation.

Sales Outlook

The report is at odds with the group’s semiannual survey issued at the end of April, a sign the slump may be short-lived, Bradley Holcomb, chairman of the group’s factory committee, said in a conference call today with reporters. Manufacturers then projected sales would grow 4.8 percent this year, up from a December estimate of 4.6 percent.

“We’ve hit a little bit of a pothole,” Holcomb said. “Hopefully, this is a momentary lull.”

Automobile purchases may help keep assembly lines running as households use low borrowing costs to replace older vehicles. Ford Motor Co., Chrysler Group LLC, and Nissan Motor Co. today reported May sales gains that exceeded analysts’ estimates. The industry tally, to be released later, may show purchases of cars and light trucks improved last month from a 14.9 million annual rate in April, according to economists surveyed.

Rockwell Automation Inc., a Milwaukee, Wisconsin-based maker of factory automation software, is benefiting as businesses strive to improve productivity and reduce costs.

Global Outlook

Among regions, “the U.S. and Canada are stable and we continue to see investments across most industries,” Chief Executive Officer Keith Nosbusch said during a May 31 conference presentation. “Automotive looks solid for the next several quarters” and capital spending in consumer-related industries is “stable,” he said.

Gross domestic product rose at a 2.4 percent annualized rate in the first three months of 2013, figures showed last week. While inventory accumulation was slower than initially estimated, providing less of a boost to the economy, it sets the stage for growth this quarter as higher sales may prompt more stockpiling.