Manufacturing Grows Once Again
"The steepness of June's reading suggests we ought to see sizable improvements in profitability in the second half of the year. This is very much an upbeat reading on the U.S. economic recovery,"
biz.yahoo.com
By Eric Burroughs
NEW YORK (Reuters) - U.S. manufacturing grew for a fifth straight month in June as solid demand prompted factories to boost production to the highest level in three years, providing more evidence the factory sector's rebound is gaining momentum.
Economists said the ongoing rise in factory output should result in better profits later in the year -- key for a stock market battered by accounting scandals and bruised investor confidence.
The Institute for Supply Management (ISM) said its monthly manufacturing index rose to 56.2 in June -- the fastest pace since February 2000 -- from 55.7 in May and beating forecasts for a rise to 55.8.
Any reading above 50 suggests growth in the sector that makes up about one-sixth of the economy, while one below 50 indicates contraction.
"The steepness of June's reading suggests we ought to see sizable improvements in profitability in the second half of the year. This is very much an upbeat reading on the U.S. economic recovery," said John Lonski, chief economist at Moody's Investors Service.
The report showed a rise in prices to a two-year high mostly due to the U.S. tariffs on foreign steel, as well as rising demand for U.S. exports thanks to the dollar's roughly 10 percent slide against major currencies this year.
But while some firms were starting to hire workers, the job market remained weak and the index indicated that layoffs continued for a 21st straight month.
Analysts cautioned the pace of factory activity would likely ease in coming months as new orders slow and firms no longer need to restock inventories so heavily.
"Production and new orders have driven the (index) to this point. They can't continue to sustain those kinds of high levels," said Norbert Ore, chair of ISM's manufacturing survey committee.
Long-term U.S. Treasuries extended losses on a jump in the ISM's prices paid index to a two-year high, while U.S. stocks showed little reaction.
Ongoing jitters about profits sent the broad Standard & Poor's 500 index (CBOE:^SPX - News) falling nearly 1 percent despite news from diversified manufacturer 3M Co. (NYSE:MMM - News) that its second-quarter earnings would beat forecasts.
BOOMING PRODUCTION, FEW NEW JOBS
With inventories low, factories have boosted production this year to meet rising demand and replenish shelves emptied by last year's record-paced run-off. The ISM's production index rose to 61.4 in June to its highest level since June 1999 from 58.5 a month earlier.
But so far the manufacturing rebound has not led to new hiring or stronger capital investment -- what Federal Reserve officials say they want to see as proof a sustainable expansion is under way. Saddled with much unused capacity, few manufacturers have needed to make major capital investments or hire new workers to meet the increase in production.
Factories shed more jobs in June, extending a trend since mid-2000 even as the ISM employment index rose to 49.7 from 47.3 in May and moved ever closer to a level that would indicate job growth.
That comes before data on the labor market later in the week, which is expected to show the economy adding 86,000 jobs but with the unemployment rate rising to 5.9 percent, according to a Reuters poll of economists. Since mid-2000, the manufacturing sector has lost nearly 1.8 million positions.
"The rising trend in the ISM manufacturing index points not only to more employment, but also to higher corporate profits because historically corporate profits and production have one of the best correlations," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.
With the economy expected to have slowed in the second quarter from a 6.1 percent spurt of growth in the first and the outlook murky, many analysts believe the Federal Reserve will wait until late in the year or until 2003 before hiking interest rates from four-decade lows of 1.75 percent.
Firms saw demand from abroad accelerate in June on the back of the dollar's slide. The ISM's new export orders index rose to 54.5, the highest since March 2000, from 53.3 a month earlier. The dollar's strength in recent years had caused manufacturers to cry foul, saying they were losing crucial market share to foreign competitors.
In another potentially positive sign for profits, the ISM prices paid index rose to highest level since mid-2000 at 65.5 in June from 63.0 a month earlier. The increase was due primarily to the U.S. steel tariffs imposed earlier this year, the report said, but also due to greater pricing power among firms.
ISM's Ore said he was not concerned about inflation in manufacturing and that the pace of price increases should slow in coming months.
The Tempe, Arizona-based ISM bases its manufacturing index on data provided monthly by purchasing executives at over 350 industrial companies and reflects changes in the current month compared with the previous month.
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