Manufacturing Index Up in May, Beating Expectations

By Tali Arbel | June 1, 2009 | 4:15 PM EDT
New York (AP) - On the same day of manufacturing icon General Motors Corp.'s bankruptcy filing, reports on the industrial sector from around the globe seemed to show the sector on the mend.
The decline in U.S. manufacturing slowed in May, a trade group reported Monday, and the sector is faring better than analysts had expected. Similar reports from Asia and Europe also showed improvements in manufacturing.
Companies used up huge stocks of inventories in the first quarter, said Joshua Shapiro, chief U.S. economist at research firm MFR Inc., boosting new orders to manufacturers and pumping up production.
The Tempe, Ariz.-based Institute for Supply Management said its index on manufacturing came in at 42.8 - its highest level since September - compared with 40.1 in April. A reading below 50 still indicates contraction, but the measure has been shrinking more slowly every month since December.
Analysts polled by Thomson Reuters had expected the index to read 42 for May.
Still, even after the sector starts to grow again, it will be a "low-growth" scenario, said Norbert Ore, chair of the ISM's manufacturing report.
"A low-growth scenario probably means a jobless recovery as far as manufacturing is concerned," Ore said. The "overall spending level, debt level of the country isn't going to support a high growth rate. I don't see the drivers that would drive us to a high growth scenario" - namely, confident consumers and free-spending businesses.
On Monday, the government said consumer spending slipped 0.1 percent in April. It was the second straight month that consumers spent less - even as their incomes grew by 0.5 percent. The personal savings rate grew to 5.7 percent, the highest since February 1995.
And even beyond the auto sector, major manufacturers in many sectors continue to discharge workers.  Last month, medical technology maker Medtronic Inc. said it would eliminate up to 1,800 positions, and computer giant Hewlett-Packard Co. about 6,400.
Even though ISM noted that May's decline was the 16th straight month of contraction in manufacturing, the report showed "signs of improvement" since last month and the 28-year low of 32.9 in December.
An index of new orders rose to 51.1 in May from 47.2 in April. It was the first month of growth in the new-orders index since November 2007, with nine of 18 industries reporting growth.
Growth in new orders from businesses and consumers means manufacturers will need to ramp up production. At the same time, an index of customer inventories fell below 50 for the second straight month, which means manufacturers' clients will probably need to restock.
The production index clocked in at 46 from 40.4 in April - the ninth consecutive decline.
"ISM is being lifted partly by a catching-up or rebound after the post-Lehman plunge, during which time companies seem to have slashed their spending more deeply than was sustainable, and partly by an unfreezing of world trade," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a research note.
Lehman Brothers collapsed in mid-September, sinking markets and sparking a global crisis in financing.
ISM also said that while a reading below 50 indicates contraction in manufacturing, a level above 41.2, if sustained over time, has historically signaled an expansion of the overall economy. The ISM hadn't been above 41.2 in seven months.
But some experts said historical indicators don't necessarily apply now.
"This is a once-in-a-lifetime recession being controlled by a debt bubble," Shapiro said. "The normal road map doesn't apply."
While the free-fall in manufacturing may be over, he said, a recovery could be limited to a weak level.
Economists also noted that the prices manufacturers paid were moving higher, which would weigh on earnings. That is due in part to oil prices' surge higher, nailing a a new year high above $68 a barrel Monday.
Last year's skyrocketing oil prices to near $150 a barrel inflicted major damage on the economy.
The Commerce Department last week said the economy contracted at a 5.7 percent pace in the first quarter following a 6.3 percent annualized drop in the fourth quarter of 2008, the biggest in a quarter century. Still, analysts are hopeful the economy is on the mend and is shrinking at a much slower pace now.
The data from ISM, made up of indicators including new orders, production, employment, inventories, prices, and export and import orders, comes on top of reports indicating an easing in the manufacturing crunch in China, Great Britain and the euro zone.
Two gauges of manufacturing in China indicated expansion. The brokerage CLSA Asia-Pacific Markets said its monthly purchasing managers index rose to 51.2 in May from April's 50.1. The official China Federation of Logistics and Purchasing said its own measure slipped to 53.1 from April's 53.5 - still a growth reading.
Meanwhile, in Europe, data provider Markit said its monthly purchasing managers index for the euro-using countries was revised up to a seven-month high of 40.7 last month from 40.5.
And a British measure rose for the third straight month to 45.4 in May from 43.1 in April.
On the same day of manufacturing icon General Motors Corp.'s bankruptcy filing, reports on the industrial sector from around the globe seemed to show the sector on the mend.