Manufacturing sector fails to grow

June 2, 2003 at 10:45 AM
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NEW YORK, June 2 (UPI) -- The Institute for Supply Management said Monday economic activity in the manufacturing sector failed to grow in May for the third consecutive month amid concerns over severe acute respiratory syndrome and the recent decline in the value of the U.S. dollar.

The group's much-watched manufacturing index improved 4 percentage points to 49.4 in May from 45.4 April, 46.2 in March but was below the 50.5 percent posted back in February.

Economists on Wall Street were expecting the index to improve to 48.5 percent during the month.

The index is closely watched by Wall Street because a reading below the key 50 level indicates the sector comprising one-fifth of the economy is shrinking. A reading above 50 percent indicates that the manufacturing economy is generally expanding.

A level above 43 or so, but below 50, indicates that the U.S. economy is still growing even though the manufacturing sector is contracting. Any level below 43 indicates that the economy is in recession.

Investors watch the report because they need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM manufacturing index, investors will know what the economic backdrop is for the various markets.

The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.

The ISM manufacturing data gives a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets.

More than one of the ISM sub-indexes provides insight on commodity prices and clues regarding the potential for developing inflation.

The Federal Reserve keeps a close watch on this report that helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report.

Norbert J. Ore, chairman of the Institute for Supply Management's Manufacturing Business Survey Committee, said despite the third consecutive decline, there was hope.

"There are signs of life in manufacturing as both the new orders index and the production index rose above the 50 percent mark after each had seen two consecutive months of decline," he said.

Ore also reported good news on the pricing front as the prices index declined 12 percentage points, leaving it just above the breakeven point, and order backlogs grew in May following 10 months of decline.

"These are all signs of encouragement that manufacturing is recovering from the decline due to the war," Ore said.

The group said comments from purchasing and supply managers focused on the continued weakness in many sectors, pressure from natural gas prices, SARS concerns in Asia, and the impact of a declining dollar.

The latest report showed the new orders index rose 6.7 percentage points to 51.9 percent from 45.2 percent in April, the production index rose 4.5 percentage points to 51.5 percent from 47 percent and group's employment index improved to 43 percent from 41.4 percent reported in April.

ISM said its supplier deliveries index improved to 51.3 percent from 50 percent, the inventories index rose to 46.1 percent from 42.7 percent, the customers' inventories index inched up to 45 percent, from 44.5 percent while the prices index sank 12 percentage points in May to 51.5 percent from 63.5 percent in April.

The report also showed the backlog of orders index increased to 51 percent from 47.5 percent in April, the new export orders index slipped to 50.8 percent from 51.1 percent, while the imports index declined to 52.2 percent from 54.5 percent a month earlier.

ISM also reported that of the 20 industries in the manufacturing sector, 11 industries reported growth.

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