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Manufacturing slow down boosted stocks they say Original Source Link: (May no longer be active)
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U.S. Economy: Factory Growth Slows for a Sixth Month (Update3)
June 1 (Bloomberg) -- U.S. manufacturing expanded in May at the slowest pace since June 2003 and cost pressures eased, boosting prospects Federal Reserve policy makers may soon stop raising interest rates.
The Institute for Supply Management said today in Tempe, Arizona, that its factory index fell to 51.4 in May, the sixth straight decline, from 53.3. Orders, production and employment slowed last month. Readings higher than 50 indicate growth. A gauge of prices paid for raw materials, while still signaling rising costs, declined by the most in three decades.
Slower manufacturing growth and fewer price pressures suggest the economy is expanding at a pace that won't fuel inflation. The report, along with comments from Fed Bank of Dallas President Richard Fisher that policy makers may be close to ending their string of interest-rate increases, buoyed stocks and Treasury securities.
``The thing that impressed me most was the drop in the price index,'' said Anthony Chan, a senior economist at JP Morgan Asset Management in Columbus, Ohio. Chan forecast the index would drop to 51.5. Fisher's comments and the factory report ``tell me the mission to raise rates isn't totally accomplished, but we are getting close.''
Construction spending in April increased 0.5 percent to a record level, led by more work on homes, offices and commercial space, Commerce Department figures showed today.
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 surveys more than 400 companies in 20 industries, including clothing, printing, transportation, furniture and plastics to compile its index.
`Eighth Inning'
``We're clearly in the eighth inning of a tightening cycle,'' Fisher, a Fed voting member, said in an interview with CNBC today. ``We've been doing 25 basis points per inning. We have a ninth inning coming up at the end of June.'' There is ``room to tighten a little bit further. Then we will see how we are standing against inflation,'' he said.
Other Fed officials have suggested policy makers can keep raising rates in quarter-point increments. Atlanta Fed President Jack Guynn said on May 26 that central bankers must continue to raise rates at a gradual pace to avoid ``a more painful path of steep hikes'' should inflation accelerate.
Fed
Michael Moskow, president of the Chicago Fed Bank, said the same day that the Fed can boost rates ``at a measured pace. But if inflation prospects worsen, we will act as necessary.''
The Fed has raised its benchmark interest rate 2 percentage points to 3 percent since June of last year. Policy makers are forecast to raise the overnight bank rate another quarter point at their June 29-30 meeting.
Today's report showed 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 13- point decline was the most since an 18-point plunge in July 1973. Economists forecast the price index to fall to 67.5.
``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.
Treasury Market
The 4 1/8 percent Treasury note rose 19/32, pushing down the yield down 7 basis points to 3.91 percent at 2:18 p.m. in New York. The Standard & Poor's 500 Index increased 11 points, or 1 percent.
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 $1.2230 at 2:18 p.m. in New York from $1.2304 late yesterday.
The U.S. manufacturing 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.
`Uneven Activity'
``There is some uneven activity, but I don't think you are seeing what would be considered a real slowdown,'' said William Zadrozny, chief executive of Siemens Financial Services, the Iselin, New Jersey-based lending unit of Siemens AG, in an interview. ``Business is still good. Not great, but good.''
Ford Motor Co., the second-largest U.S. automaker, said today it will cut North American production 2.3 percent in the third quarter after the company's sales slumped 11 percent in May. Ford and General Motors Corp. have been slowing production to clear out unsold vehicles.
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 Labor Department is forecast to report on June 3 a 5,000 decline in May factory employment after a 6,000 decrease a month earlier, according to a Bloomberg News survey.
Inventories
The inventories index dropped to 47.8 from 47.9. 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.
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.
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.
Last Updated: June 1, 2005 14:27 EDT
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