Manufacturing Activity Expands for First Time in Five Months

MBA (7/2/2008 ) Velz, Orawin
The nation’s manufacturing activity remained sluggish while facing increased price pressures, according to the Institute for Supply Management manufacturing survey. However, the ISM manufacturing index indicated that manufacturing activity expanded in June, with the index rising modestly to 50.2 from 49.6 in May.
A reading of 50 or above indicates an expansion in the manufacturing sector. This was the first reading above 50 since January.

The performance of the ISM index over the past several quarters is consistent with a stagnate economy that is not in a recession. The index showed that activity has not contracted as much as in a typical recession. During the 2001 recession, the ISM index averaged around 43, significantly lower than what we have seen the index perform since the fourth quarter of last year.

Although manufacturing has improved modestly over the past couple months, it remained weak. The index averaged 49.5 in the second quarter, compared with 49.2 and 49.6 in the first quarter of 2008 and the fourth quarter of 2007, respectively. It appeared that manufacturing was not a contributor to economic growth in the second quarter.

The ISM manufacturing index is based on a survey of purchasing executives at roughly 300 industrial companies. It includes nine different sub-indices: new orders, production, employment, supplier deliveries, inventories, prices, new export orders, imports and backlog of orders.

Forward-looking components of the index suggested little improvement in activity in the near term. New orders edged down to 49.6 from 49.7, while the production index rose to 51.5 from 51.2. Strong demand for capital goods overseas continued to support manufacturing activity. Although the export component fell one point to 58.5, it remained at a high level. Employment outlook remained gloomy, declining from 45.5 to 43.7, the lowest reading since May 2003.

The component related to prices continued to show a worrisome trend, with the prices that manufacturers are paying for inputs trending up. While the decline in the dollar has helped boost exports of manufacturing goods, it has increased imported input prices. The prices-paid index increased 4.5 points to 91.5 and has reached its highest reading since July 1979. While the overall inflation level is a lot lower now than in the late 1970s, the jump in the price paid component reflects the significant upward trend of the price of oil, a main raw material used by manufacturers.

A separate report showed that residential construction spending remained weak but healthy nonresidential construction spending continued to support overall construction spending. Total construction spending fell 0.4 percent in May. Private construction spending dropped 0.7 percent, as private residential construction spending declined 1.6 percent and private nonresidential construction spending edged up 0.2 percent. Public construction spending increased 0.4 percent.

From a year ago, private residential construction spending has declined 27.0 percent. By contrast, private nonresidential construction spending was up 16.6 percent over the past year. Residential construction spending was likely a large drag to economic growth again in the second quarter of 2008.