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U.S. Manufacturers Losing Steam

Retail Editor 2, Don Hogsett, July 3, 2006

The nation's big manufacturing sector, a key driver of the U.S. economy, was still growing during May, if only modestly, but momentum has slowed sharply over the past four months, raising serious questions about the impact of rising interest rates and oil prices on the second half of the year.

Indeed, of the 10 key components measured in the widely watched gauge of the health of manufacturing, eight headed south, while only two gained. And upsettingly, the one that grew the most, and fastest, was the prices paid for supplies and raw materials.

In a closely studied appraisal of smokestack America, the nation's purchasing managers said their gauge of monthly activity fell 2.8 percentage points during May to a level of 54.4% — suggesting continued growth, but at a far slower pace. A reading greater than 50 indicates expansion in the sector, while anything beneath that line points to contraction.

The slowing growth “is evidenced by a significant loss of momentum in the last four month,” said Norbert J. Ore, chairman of the Institute for Supply Management's Manufacturing Business Survey Committee. Underlining the extent of the slowdown, he said, is the New Orders component of the index, which has fallen precipitously to a reading of 53.7, down a stark 8.2 percentage points from a reading of 61.9 just four months ago, in February.

At the same time, the breadth as well as the depth of the slowing in the sector is illustrated by the fact that eight of the 10 components of the index headed south during May: new orders, production, employment, supplier deliveries, inventories, customers' inventories and imports all declined.

Most troubling, perhaps, is the one metric showing the greatest growth — the prices manufacturers pay for supplies and raw materials. The Prices Index, perhaps the most closely scrutinized, shot up by 5.5 percentage points during May to a level of 77.0, by far the single highest, and fastest growing, metric. Underscoring the toll this is taking on suppliers, the Prices Index has soared up by 14.5%, almost a sixth, in the last four months alone, since a reading of 62.5 in February.

Asked to identify their principal concerns, a number of manufacturers pointed to rocketing energy prices:

  • “Continued concerns regarding inflation, centered around the extreme high price of crude oil and related energy products,” said one in the chemical industry.

  • “Commodity prices are at record high levels and many are going on allocation,” said another in fabricated metals.

  • “Fuel surcharges now up to 19.8%,” said a transportation and equipment company.

  • “Current estimates are that the Yuan will appreciate 5% to 15%, thus increasing our prices for products supplied out of China,” said a rubber and plastic products executive.

May snapshot
Manufacturing benchmarks
Month-over-month percentage point change

Source: Institute for Supply Management
Purchasing Managers' Index -2.9%
New Orders -3.9
Production -3.2
Employment -2.9
Inventories -3.3
Customers' Inventories -2.5
Prices Manufacturers Pay +5.5
Order Backlogs -4.0
Export Orders +2.3
Imports -2.5

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