U.S. June NAPM Index Falls to 51.8; Price Index Drops (Update1)
By Noam Neusner
Washington, July 3 (Bloomberg) -- U.S. manufacturing expanded in June at the slowest pace in a year and a half as orders and production cooled, an industry survey of executives showed. A gauge of prices paid for raw materials declined for a third month.
The National Association of Purchasing Management said its monthly factory index fell to 51.8 in June from 53.2 in May. June's index was the lowest since it was 49.9 in January 1999, when manufacturing began to climb out of a yearlong slump caused by recessions in Asia and Latin America.
``Manufacturing has faded again outside of high tech,'' said Robert Dederick, an economic consultant at Chicago's Northern Trust. ``Whether it's higher interest rates or foreign competition, manufacturing is on a sluggish growth path.''
U.S. Treasury securities soared after the report, which suggest six interest rate increases by the Federal Reserve in the last year may have started to slow the economy enough to keep inflation in check.
The NAPM production index, a gauge of current output, fell to 53.6 in June -- the lowest since January 1999 -- from 56.3 in May. The new orders index, a gauge of current demand, fell to 50.6 in June -- the lowest since December 1998 -- from 51.1 in May.
``Comments from purchasing managers this month generally expressed concern about interest rates, fuel prices, a construction slowdown, SUV sales and the tight labor market,'' the NAPM report said. ``Members report strong business in the high- tech sector while the commodity-based industries are seeing a slowing.''
Backlogs, Inventories
A separate index of order backlogs fell to 48.5 in June from 49, which had been the first drop below 50 since February 1999. The export index, a gauge of international demand, fell to 53.2 in June from 56.3 in May. The imports index rose to 56 in June from 54.7.
The inventory index, another gauge of pent-up demand, rose to 47.4 in June from 47.1 in May. The employment index, a gauge of hiring plans and labor market conditions, fell to 50.8 in June from 54.1 in May.
NAPM's prices-paid index in June fell to 61.2 -- the lowest since August 1999 -- from 65.8 in May. The prices index has fallen since March, when it reached a five-year high of 79.8.
The U.S. Treasury's 10-year note rose 7/32 point after the report, pushing its yield 3 basis points to 6 percent.
There are signs that higher prices, particularly from oil and other energy products, have hurt manufacturing. Crude oil prices, which had driven the price index to its five-year high, rose from an average of about $26 a barrel at the start of May to more than $30 for four weeks in a row.
Terra Industries
Fertilizer maker Terra Industries Inc. said earlier this week it will idle its Blytheville, Arkansas, plant and will fire 70 of the plant's 100 workers because of soaring prices for natural gas, the raw material for its ammonia and urea products.
The Arkansas plant had been shut down for repairs and won't re-open until natural gas costs decrease or until prices for ammonia and urea increase, Terra said. Terra said it has already cut back its fertilizer production in North America by about 13 percent.
Kaiser Aluminum Corp. said last month it cut 128,000 metric tons of annual aluminum production capacity in Washington because of rising power costs. In addition, Kaiser raised prices 5 percent on some types of processed aluminum.
Overall, though, manufacturers appear to be operating at close to full capacity. In May, orders for durable goods, defined as big-ticket goods built to last at least three years, rose 6 percent, the government reported last week. And last month, the Federal Reserve reported that manufacturers' factories operated in May at 82.1 percent capacity, matching the highest level in two years. Production of semiconductors rose 4.4 percent.
Consumer demand for wireless communications equipment is helping companies like Schaumburg, Illinois-based Motorola Inc. The No. 2 maker of cellular phones said recently sales of wireless network equipment will rise 20 percent this year, more than its previous forecast of 15 percent.
FOMC Decision
That kind of growth has generated concerns among central bankers that the U.S. can't continue to meet the demand for goods, services and workers without setting off a surge in prices.
Last week, members of the policy-making Federal Open Market Committee said that ``tentative'' signs of economic slowing allowed them to hold the overnight bank lending rate at a nine- year high of 6.5 percent. At the same time, Fed officials said the economy's growth in demand is outstripping its ability to produce, raising the risk of inflationary acceleration.
The economy grew at a 5.5 percent annual rate in the first three months of the year, paced by the largest increase in consumer spending in almost 17 years. The economy has grown at a 5 percent or higher pace for three consecutive quarters. The last time that happened was in 1983-84, when the U.S. was pulling out of a recession.
There are some signs manufacturing may be accelerating after taking a breather in April. The Philadelphia Federal Reserve's general economic index fell in June to 1.7, the worst performance in two years, from 20.2 in May, as manufacturers said they saw declines in new orders and shipments.
Signs of Slowing
And, some manufacturers say business is slowing. Lake Forest, Illinois-based Brunswick Corp., which makes fitness equipment and sporting goods like bowling balls, said this week it will sell its bicycle, camping and fishing businesses because they are not meeting their financial goals and because low-cost imports from Asia have hurt those businesses.
Navistar International Corp., the world's No. 3 truck-maker, said the industry's North American truck output could fall as much as 20 percent in its 2001 fiscal year, which begins Nov. 1. And, in a bid to improve market share, DaimlerChrysler AG and General Motors Corp. raised rebates on selected vehicles in June. General Motors then offered low-interest rate financing on its Saturn L- series, Chevrolet Malibu and Oldsmobile Alero in the northeastern U.S.
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