Trade group says manufacturing index slows in June, but still shows growth in sector

Thursday, July 1, 2010

Manufacturing slows in June, still shows growth

NEW YORK — An industry trade group’s manufacturing index slipped in June, but was still at a level that suggests growth in the industrial sector.

The manufacturing sector has been one of the U.S. economy’s bright spots for nearly a year as companies restock inventories and replace old equipment. As the initial burst of activity for companies coming out of a deep decline during the recession drops off, economic growth will slow, analysts say — especially if consumer spending remains weak.

The Institute for Supply Management said Thursday its index fell to 56.2 last month from 59.7 in May.

That was a steeper drop than economists expected. They were looking for a reading 59 for last month, according to a survey by Thomson Reuters.

A reading above 50 indicates expansion.

“The problem in the current recovery is that it has largely been concentrated in the manufacturing sector and if growth in the sector slows, and it is, then there is no sector ready to take the growth baton,” said Dan Greenhaus, chief economic strategist of Miller Tabak.

The Commerce Department said last week that the economy grew at an annual rate of 2.7 percent in the first quarter. Slower growth in manufacturing suggests the broader economy is going to be more “subdued” for the rest of 2010, said Alistair Bentley a research analyst at TD Bank Financial Group, growing from 2.5 to 2.8 percent.

Some manufacturers, especially those whose products are geared to the housing sector, remain cautious. La-Z-Boy Inc., a furniture maker, said last month that low consumer confidence and an “unstable” housing market were a concern for the company.

“We’re just not seeing any indication that overnight, business is going to get substantially better,” said La-Z-Boy CEO Kurt Darrow on a June 15 conference call with investment analysts.

The economic momentum is also slowing worldwide. Surveys released Thursday in China showed a slowdown in factories’ growth as exports faltered and analysts worry that cutbacks in government lending will cool the economy’s rapid rise. Reports from Markit Economics also indicated that manufacturing sector growth in India, South Korea, Australia and Taiwan was slowing.

The industrial sector’s growth also cooled slightly in the 16 countries using the euro and the United Kingdom.

ISM’s report showed that in the U.S., new orders and production are not growing as fast as they had been. Strength in new orders, which signal future production, hit a five-year high in January.

The report still suggests that manufacturers plan to hire more, but that measure has also weakened slightly.

The high level of productivity of industrial companies has restrained hiring. Manufacturers shed more than 2 million jobs in the recession, and have added back just 126,000 jobs this year.

That’s still about a quarter of the total private-sector jobs created this year, even though manufacturing jobs make up only about 10 percent of the private-sector U.S. workforce.

“Coming out of recession, manufacturing has driven a lot of growth, been a really key element to job creation,” Bentley said. “Now we’re entering a phase where that’s going to slow.”

Thirteen of the 18 industries surveyed said they were expanding in June, while four said they shrank and one reported the same pace of activity.

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