U.S. factories are gearing down more quickly than expected, casting a pall over hopes for economic growth in the second half of the year.
The Institute for Supply and Management’s factory index, a closely-watched gauge of American manufacturing, dropped to 50.9 in July, the worst showing in two years. A score below 50 signals contraction; anything above the 50 mark implies expansion.
The most worrisome aspect: An ISM measure of new orders declined. As the most forward-looking indicator, it shows softening confidence, and suggests that factory owners will do little new hiring in the months ahead.
The latest evidence that the U.S. recovery is sputtering was enough to reverse a stock market rally that rolled through Asia and Europe after U.S. President Barack Obama late Sunday endorsed the debt agreement struck by lawmakers after weeks of strained discussions.
In New York, equities burst higher in the morning, with the Standard & Poor’s 500 index gaining as much as 1.2 per cent Monday, then tumbled. The index ended the day 0.4 per cent lower than Friday’s close, at 1,286.94, the sixth consecutive loss. Canadian markets were closed.
Bradley Holcomb, chair of the ISM Manufacturing Business Survey Committee, argues that 50.9 is still in the growth range but admits that the numbers are “disappointing and represent the lowest for the year.”
Still, there was some good news in the numbers on manufactured exports. Driven by a weakening U.S. dollar, demand from emerging economies for U.S. goods continues to grow, with the ISM’s index climbing up half a point to 54. “Global aspect of exports is certainly one of the positives here. It’s the domestic demand that’s the concern,” Mr. Holcomb said.
Steven Hoffman, president of Buttonwood Corp. in Brooklyn, N.Y., a button and toggle manufacturer, says the dismal numbers accurately reflect reality on the factory floor.
“Business is really in the toilet,” he said. He says the company is expected to produce 400,000 buttons this year, down from 650,000 in 2009.
Mr. Hoffman attributes the drop to the price of gasoline cutting into consumer spending. “Since the price of gasoline hit $4.50 per gallon, we’ve seen a sharp turn in business,” he said.
He’s not sure how long he can last. “Button making in America is in peril. The whole manufacturing industry is in peril.”
Zierick Manufacturing Corp., maker of electronic connectors used in home appliances, tells a similar story.
“Last year was a great year for us. And then [the Japanese]tsunami hit,” said Gretchen Zierick, president of the Mount Kisco, N.Y., company. “I’m worried. I used to be able to count on a number of orders coming in every day. Now, some days there are none at all, which is just as bad as it was in the worst of the downturn.”
Daniel Meckstroth, chief economist of Manufacturers Alliance, an industry group in Arlington, Va., believes automotive sales will increase in the third and fourth quarter because of pent-up consumer demand for big-ticket items that was postponed during the recession. Anecdotal evidence has indeed shown that auto production has bounced back in July, and is rapidly recovering from the supply chain disruption from earlier in the year, he said.
“There is much good news to expect towards the end of the year.”
All eyes will be on ISM’s non-manufacturing numbers – a less volatile measure that accounts for about 90 per cent of the U.S. economy – which are to be released on Wednesday, and the July employment numbers due Friday.
The U.S. remains the world’s largest manufacturing economy, producing $1.6-trillion (U.S.) worth of products. Manufacturing accounts for 11.2 per cent of the U.S. GDP.
With files from reporter Kevin Carmichael in Washington