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U.S. ISM Factory Index Falls to 51.4 in May From 53.3

Bloomberg | June 1, 2005

The pace of U.S. manufacturing growth slowed in May for a sixth straight month, reflecting fewer orders, less production and a decline in factory employment, a private survey showed.

The Institute for Supply Management said today that its factory index fell to 51.4 from 53.3 in April. Readings higher than 50 indicate growth. The index is the lowest since June 2003, when manufacturing started an uninterrupted expansion.

Companies trying to hold down costs may have been reluctant to add to inventories that grew during the first quarter, limiting the need for additional production. Consumer spending and business investment to update equipment will probably keep manufacturing from slipping much further, economists said.

``Businesses have been paring back inventories, and that makes for sluggish growth,'' said Michael Gregory, a senior economist at BMO Nesbitt Burns in Toronto, before the report. ``A lot of companies are still somewhat cautious about spending, but investment is still grinding higher and that will be enough to keep the factory sector expanding.''

A reading of 52 was forecast for May, based on the median estimate of 72 economists in a Bloomberg News survey. Projections ranged from 48.5 to 55. The institute, based in Tempe, Arizona, surveys more than 400 companies in 20 industries, including clothing, printing, transportation, furniture and plastics to compile its index.

The group's new orders gauge, which makes up about a third of the total, dropped to 51.7, the lowest since April 2003, from 53.7 in April. The production index, a measure of work being performed, fell to 54.9 from 56.7.

Prices Paid

Lower energy prices and increased supplies of commodities such as steel helped ease cost pressures for manufacturers. The institute's prices paid index declined to 58, the lowest since September 2003, from 71 in April.

``The pricing pressures that the Fed mentioned in the latest FOMC minutes may be a little bit less than what they saw in prior months,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, in an interview.

The backlog of orders gauge fell to 51 from 53. The index of supplier deliveries, which measures how long it takes to get materials, declined to 50.5 from 51.5.

The factory institute's employment index decreased to 48.8, the lowest since October 2003, from 52.3 in April. The inventories index dropped to 47.8 from 47.9. The new export orders index fell to 54.9 from 57.2.

Euro

In the dozen euro nations, manufacturing shrank by the most in almost two years in May. A measure of manufacturing fell to 48.7, the lowest since July 2003, from 49.2 in April, according to an index based on a survey of about 3,000 purchasing managers compiled by NTC Research Ltd. for Reuters Group Plc.

The euro declined after the European Commission cut its second-quarter growth forecast to 0.3 percent from a May 12 estimate of 0.4 percent. Against the dollar, the euro fell to $1.2257 at 10:24 a.m. in New York from $1.2304 late yesterday.

Inventories in the first quarter piled up at the fastest pace in almost five years, suggesting companies intent on keeping down expenses would sell from existing stockpiles before ordering more. At the start of the second quarter, there were signs they were becoming successful.

Durable goods stockpiles in April showed the smallest gain since January 2004, the Commerce Department said in Washington on May 25. Unfilled orders, a gauge of future production, were unchanged after falling 0.2 percent.

Regions

The Federal Reserve Bank of New York said manufacturing in the state unexpectedly plunged in May, showing the first contraction since 2003. Separate measures of manufacturing in the Philadelphia region and the Chicago area declined to two-year lows.

Philadelphia-based Rohm & Haas Co., the world's biggest producer of acrylics used in paints and plastics, plans to close a powder-coatings plant in Wytheville, Virginia, that employs 70 workers to reduce costs amid weakening demand.

Bloomington, Minnesota-based Toro Co., which makes lawnmowers and other yard-care products, said it may not meet earnings expectations for this quarter after bad weather in the U.S. left inventories high at retailers. Automakers General Motors Corp. and Ford Motor Co. are cutting second-quarter production to reduce inventories that have swelled as sales declined.

Companies may spend more in coming months to upgrade aging equipment and increase efficiency, said economists including Stuart Hoffman at PNC Financial Services Group Inc. in Pittsburgh.

Business fixed investment may rise 9.3 percent this year after increasing 10.6 percent in 2004, according to economists surveyed by Blue Chip Economic Indicators.

Capital Equipment

Terex Corp., a maker of heavy-duty trucks and construction equipment, said first-quarter sales rose 39 percent from the same period last year. The Westport, Connecticut-based company is raising prices to recover more of its raw materials costs.

``We have taken pricing initiatives that should be more evident in the second quarter, and clearly the demand for our products is strong,'' said Ronald M. DeFeo, Terex's chairman and chief executive, in a statement yesterday.

Automakers and commercial truck makers are buying more products to lower emissions as they prepare for changes in U.S. and European regulations, said David Rayburn, chief executive of Modine Manufacturing Co. Racine, Wisconsin-based Modine manufactures exhaust gas re-circulation products that allow an engine to burn gasoline more efficiently. Modine is also ``spending a lot of time and money'' on products for diesel engines, Rayburn said.

Profits

Other companies are reporting stronger demand. Novellus Systems Inc., which supplies semiconductor manufacturers, raised its profit forecast yesterday, as demand for chips used in consumer electronics increases. Orders for machinery used to make flash memory chips, which are put into digital cameras and MP3 players, are exceeding the company's expectations, said Richard Hill, chief executive of San Jose, California-based Novellus, on a conference call.

Corporate profits that grew 4.5 percent in the first quarter, accounting for the largest share of gross domestic product since early 1967, give companies the wherewithal to boost spending in coming months.

``Businesses are going to spend with profits at these levels and with the amount of capital that's available,'' PNC's Hoffman said.

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