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Manufacturing Expands Once Again
Mon Jul 1, 5:05 PM ET
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.
Economists said the recovery in factory output could throw a life belt to sinking equities by boosting corporate profits.
"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.
Some hope was desperately needed with the Nasdaq <.IXIC> tumbling on Monday beneath the deep lows that followed the attacks on Sept. 11 and ending down more than 4 percent at 1,404, its lowest close since June 1997.
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, beating economists' 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.
Still, 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, chairman of ISM's manufacturing survey committee.
Reaction in financial markets was subdued with Wall Street depressed by accounting scandals and profit worries, even as the dollar rose against major currencies on the upbeat factory data. U.S. Treasuries swung higher as the slide in equities prompted safe-haven buying.
The Standard & Poor's 500 index <.SPX> fell 2.0 percent despite news from diversified manufacturer 3M Co. that second-quarter earnings would beat Wall Street forecasts.
BOOMING PRODUCTION, FEW 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, 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 ( news - web sites) officials say they want to see as proof a sustainable expansion is under way.
Saddled with much unused capacity, few manufacturers have needed to undertake capital spending projects or hire new workers to meet the increase in production.
This is the dark side of the productivity miracle in that firms are squeezing more output from existing workers.
Thus the ISM employment index stayed below the 50 weakness/growth level for the 21st month running, though at 49.7 it is edging ever closer toward net hiring.
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.
RETURN OF PRICING POWER?
In a potentially positive sign for profits, the ISM prices paid index rose to its 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.
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.
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.
A separate report from the Commerce Department ( news - web sites) said construction spending fell a larger-than-expected 0.7 percent in May from a record pace a month earlier.
Spending to build homes, offices, schools and other residential and nonresidential buildings slipped to an annual rate of $852 billion in the month before last, but that was down from an all-time high in April of $858.2 billion
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Orders for Durable Goods Grew in May; New-Home Sales Rose to Record Level
Wed Jun 26, 8:56 AM ET
By Jennifer Corbett Dooren and Elizabeth Price
Dow Jones Newswires
WASHINGTON -- Orders for big-ticket items rose in May, the fifth rise in six months.
Separately, sales of new, single-family homes rose to a record level in May, reflecting continued strength in the housing market.
Orders for durable goods -- items meant to last three years or longer -- rose 0.6% to $173.17 billion last month, the Commerce Department ( news - web sites) reported Wednesday. April durable-goods orders were revised downward to a 0.4% gain after previously being estimated as a 1.1% increase. March durable-goods orders also were revised downward to a 0.3% decline after previously being estimated as a 0.3% increase.
The May figure was in line with Wall Street's expectations. A Dow Jones Newswires-CNBC survey of economists predicted a 0.5% rise for the month.
The May durable-goods report showed gains across most categories, except defense, machinery and cars.
Orders for transportation equipment rose by 0.5%, as aircraft orders jumped by 49.2%. Orders for cars and parts, however, fell by 2%. If transportation orders were excluded, durable-goods orders would have increased 0.6%.
Defense capital goods orders were off by 9.7% after a 46.6% plunge in April. If defense orders were excluded from overall durable-goods orders, orders would have increased 0.8% for the month.
The report showed that businesses have started making larger investments again. The falloff in business spending was largely responsible for putting the U.S. into an economic recession, which began in March 2001 . The Federal Reserve ( news - web sites) Board, meeting today, is expected to keep interest rates on hold, reflecting fears the economic recovery remains tepid.
Orders for nondefense capital goods -- items meant to last 10 years or longer -- rose for the second straight month. Orders grew 3.3% in May after rising by 1.4% in April. Orders for computers and electronic products rose 1% after a 2.9% rise in April.
The report showed that orders for fabricated metal products increased 2.4% and orders for primary metals rose 0.9%. Orders for machinery slipped 0.4% in May, while orders for electrical equipment and appliances fell 2.1%.
The report also showed that durable-goods shipments were unchanged after rising by 3.4% in April. Unfilled orders fell 0.6%, while durable-goods inventories -- down for 16 straight months -- also dropped 0.6%.
New-Home Sales Rose to Record Level in May
New-home sales rose 8.1% last month to a seasonally-adjusted annual rate of 1, 028,000, the Commerce Department said Wednesday. April new-home sales figures were revised upward as a 3.9% rise to a 951,000 level. Previously, April new- home sales were reported as a 1% increase to a 915,000 level. March's level also was revised upward to 915,000 from a previous estimate of 906,000.
The May new-home sales report was much stronger than analysts' expectations. A Dow Jones Newswires-CNBC survey of economists predicted that home sales would rise by 0.5% to an annual rate of 920,000.
The housing sector of the U.S. economy has remained strong even as the overall economy slipped into a recession in March 2001 . But outside of the housing market, other economic data suggest the economy isn't as strong.
Indeed, the Federal Reserve Board is expected to leave interest rates unchanged later Wednesday amid concerns the overall economic recovery remains fragile.
The May new-home sales report showed that sales rose in all regions. Sales jumped 26.4% in the Northeast, rose 10.6% in the South and rose by 4.3% in the West and 2.7% in the Midwest.
The inventory of homes on the market declined to 3.8 month's supply in May from a revised 4.1 month's supply in April.
The median price for a new home, the midpoint of all prices, was $170,200 in May, down from $186,600 in April. The average price for a new home was $224,300 last month, down from $226,400 in April.
On a year-over-year basis, new-home sales rose by 16.3% in May.
-By Jennifer Corbett Dooren and Elizabeth Price; Dow Jones Newswires; 202-862- 9200
Manufacturing Posts 5th Month of Growth
Mon Jul 1,11:22 AM ET
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 that the hard-hit 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 revelations of 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.
U.S. Treasuries extended losses slightly on the upbeat news, while U.S. stocks showed little reaction. Ongoing jitters about profits kept the broad Standard & Poor's 500 index <.SPX> mostly flat on the session.
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 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 ( news - web sites) officials say they want to see as proof a sustainable expansion is under way.
With the economy slowing 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 2003 before hiking interest rates from four-decade lows of 1.75 percent.
Norbert Ore, chair of ISM's manufacturing survey committee, said the year-over-year numbers were not as robust, and the main index may have peaked for the time being. He also said that some industries were starting to hire workers again but the job growth was not strong.
Firms saw demand from abroad accelerate in June on the back of the dollar's hefty 8.5 percent slide against major currencies this year on a trade-weighted basis. The 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 Prices Paid Index rose to its 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.
Factories shed more jobs, extending a trend since mid-2000 even as the Employment Index rose in June to 49.7 from 47.3 in May and moved ever closer to a level that would indicate job growth.
"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.
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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