Higher Energy Prices Slow U.S. Manufacturing's Growth

The Institute for Supply Management (ISM) on September 1 offered fresh evidence that higher energy prices are slowing the pace of U.S. manufacturing. Its closely watched PMI index decreased to 53.6% in August, down three full percentage points from 56.6% in July. A figure above 50% indicates the manufacturing sector of the economy generally is growing; a figure below 50% signals that manufacturing is contracting.

While new orders, production and employment among manufacturers continued to grow in August, they did so at a slower rate. Production was down 5.3 points to 55.9%, and new orders were down 4.2 points to 56.4%. Employment was down six-tenths of a point to 52.6%.

Many of the supply managers polled by Tempe, Ariz.-based ISM expressed about concern about their ability to sustain current levels of business if high energy prices persist, relates Norbert J. Ore, chair of the institute's manufacturing business survey committee.

Although he says the overall ISM index number signals manufacturing is growing "at a moderate rate," Daniel J. Meckstroth, chief economist at the Manufacturers Alliance/MAPI, confirms energy prices are taking a toll. "Econometric modeling indicates that manufacturing is three times as sensitive to oil prices as the economy as a whole," he explains. Its processes "are energy intensive, and its products are sensitive to reductions in consumer demand due to higher fuel prices."

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