ISM Manufacturing Index At Lowest Since June 2003

June 1, 2005
U.S. Consumer confidence, as measured by the New York-based Conference Board, increased nicely in May. Manufacturing, however, did not. Economic activity in the manufacturing sector of the U.S. economy just barely grew last month, says the Institute for ...

U.S. Consumer confidence, as measured by the New York-based Conference Board, increased nicely in May. Manufacturing, however, did not.

Economic activity in the manufacturing sector of the U.S. economy just barely grew last month, says the Institute for Supply Management (ISM), Tempe, Ariz. Its manufacturing index for May was at 51.4%, 1.9 percentage points below April's 53.3%, four-tenths of a percentage point below the 51.8% economists generally expected and the lowest the index has been since its 50.4% in June 2003.

An index figure above 50% indicates the manufacturing sector generally is expanding; an index figure below 50% signals manufacturing is contracting.

Both new orders and production continued to grow last month, but more slowly than they had been. New orders fell two percentage points to 51.7% in May from 53.7% in April, and production fell 1.8 percentage points to 54.9% from 56.7%. Employment in manufacturing stopped growing after 18 months, falling 3.5 percentage points to 48.8% from 52.3%.

"The manufacturing sector is definitely slowing, and the question is whether a somewhat stronger [U.S.] dollar and the burden of high energy costs are slowly bringing this manufacturing growth cycle to an end," says Norbert J. Ore, the chair of ISM's manufacturing business survey committee.

Indeed, rising oil prices are affecting the growth rates of U.S. manufacturers, indicates a PricewaterhouseCoopers study released June 1. A majority -- 59% -- of the companies surveyed indicated they are passing along price increases, although 41% still reported shrinking gross margins during their most recent fiscal quarter. What's more, 47% of the 73 senior executives in large, multinational industrial companies PwC surveyed cited rising energy prices as a potential barrier to growth during the next 12 months.

"The industrial sector is in the midst of a classic mid-cycle inventory correction that is adjusting for slower growth in consumer spending and a continuing rise in the imported goods share of the manufacturing sector," says Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy research group.

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