U.S. manufacturing falls for 3rd month
Posted on Friday, May 2, 2008
URL: http://www.nwanews.com/adg/Business/224512/
Manufacturing in the U. S. shrank for a third month and rising prices eroded consumers ’ buying power as the six-year economic expansion ground to a halt.
The factory index compiled by the Tempe, Ariz.-based Institute for Supply Management was unchanged at 48. 6 in April. The Commerce Department reported consumer spending rose 0. 4 percent in March. Stripping out the effect of inflation, purchases were up 0. 1 percent after stagnating the previous month.
On Wall Street, stocks jumped almost 190 points to 13, 010, the first time it finished over 13, 000 since Jan. 3. The Nasdaq composite index rose 67. 91, or 2. 81 percent, to 2, 480. 71, its highest close since Jan. 10.
The institute’s report indicated no sign of improvement from the first quarter, when only a jump in inventories prevented the economy from shrinking. Consumers and manufacturers are struggling with rising prices and the worst housing slump in a quarter century.
“The economy is still in a mode where it’s declining,” said Brian Bethune, director of financial economics at Global Insight Inc. in Lexington, Mass., in an interview with Bloomberg Radio. “These numbers certainly reflect that. We’re going to see weaker jobs numbers, and we’re going to see consumption bump along at a very slow rate.”
Thursday’s reports also showed that the Federal Reserve’s preferred measure of consumer prices rose more than expected and that manufacturers are paying the most for goods in four years. Fed policymakers Wednesday signaled they are ready to pause their series of interest-rate cuts as some former officials warn about stoking inflation.
“I really don’t think the Fed should continue to cut,” said Susan Bies, a former Fed governor, Wednesday on Bloomberg Television. Given the inflation rate, “the risk is it’s taking away from people’s spendable income.”
The Institute for Supply Management’s factory index was higher than economists had forecast as exports continued to prevent a deeper decline in manufacturing. The median estimate among 78 projections in a Bloomberg News survey was 48. Fifty is the dividing line between contraction and expansion. Manufacturers account for 12 percent of the economy.
The Labor Department reported separately that first-time claims for unemployment insurance rose more than forecast last week, to 380, 000. The total number of Americans receiving benefits climbed to 3. 019 million, the highest level since April 2004.
“Consumers are struggling,” said Ryan Sweet, an economist at Moody’s Economy. com in West Chester, Penn. “Their finances are being squeezed on two fronts: They’re getting pressure from higher energy prices and slower income and job growth.”
A report expected today is expected to show payrolls shrank in April for a fourth month, which, combined with record fuel prices and slumping home values, indicates spending may slow.
The Commerce Department also reported Thursday that spending on U. S. construction projects fell 1. 1 percent in March as home-building posted the biggest one-month drop on record.
Economists had forecast a spending gain of 0. 2 percent, according to the median of 78 estimates in a Bloomberg News survey.
Incomes increased 0. 3 percent, less than estimated, after a 0. 5 percent gain in February. The median forecast for incomes called for a 0. 4 percent increase.
Households spent mainly on services such as medical care and utilities and bought fewer big-ticket items such as cars and furniture.
The inflation measure tracked by the Fed, which strips out food and fuel prices, increased 0. 2 percent after a 0. 1 percent gain the previous month. It rose 2. 1 percent from March 2007, compared with a median estimate of 2 percent.
Policymakers on Wednesday cut the main interest rate by a quarter point to 2 percent, the seventh reduction since September. The Federal Open Market Committee removed language from its March statement that “downside” risks to growth remained and said that “substantial” easing of policy to date should help spur growth over time.
Because the increase in spending was bigger than the gain in incomes, the savings rate fell to 0. 2 percent, from 0. 4 percent the prior month. Disposable income, or the money left over after taxes, increased 0. 3 percent.
The government this week started sending out tax rebate checks as part of the Bush administration’s fiscal stimulus plan. Retailers are trying to lure shoppers to spend the extra cash.
The rebates may be more of a temporary relief for consumers burdened by gasoline prices approaching $ 4 a gallon and by three consecutive months of job losses.
“Growth may just manage to stay above the zero line yet again in the second quarter, thanks to the heavy-duty support from the rebates,” said Doug Porter, deputy chief economist at BMO Capital Markets in Toronto. Still, “much of the stimulative impact will be gobbled up by surging gasoline and food costs.” Information in this article was contributed by Bob Willis, Shobhana Chandra, Chris Burritt, Jeff Green, Courtney Schlisserman and Kathleen Hays of Bloomberg News and Madlen Read and Martin Crutsinger of The Associated Press.