Cup Half Full

Add comment June 2nd, 2008

From Today’s Wall Street Journal….

Manufacturing Remains Soft, but Give Economists Hope

U.S. manufacturing activity contracted again in May, but just barely, as exports continued to keep the sector afloat.

The Institute for Supply Management said Monday that its index of manufacturing activity rose to 49.6 in May from 48.6 in April. Despite the slight uptick, it was the fourth consecutive month that the index was below 50; readings below 50 signal a contraction in overall activity.

Even so, the report was better than many economists expected, bolstering other recent data suggesting the economy is stagnant but not collapsing.

A separate report showed construction spending in April dropped by a seasonally adjusted 0.4% from the previous month, to $1.12 billion. Spending on private nonresidential construction, which includes hotels and office builders, surged 1.6%, partly offsetting the slump in residential construction, which declined 2.3% in April and is down 21% from a year earlier, the Commerce Department said.

In the ISM report, exports continued to increase, extending a five-and-a-half year trend that is helping to offset slowing U.S. demand, and production expanded. New orders rose. But high commodity costs pushed prices to a four-year high, and employment and inventories contracted.

“Were it not for the weak dollar,” which makes prices of U.S. goods cheaper abroad and stimulates export orders, “I really do believe we’d be looking at far lower readings,” said Norbert Ore, a Georgia-Pacific Corp. executive who directs the survey. He noted that 80% of ISM member companies are exporters.

The weak dollar also is contributing to the run up in oil prices. Companies that have been trying to increase productivity or cut costs are running out of options, but are worried about raising prices, out of fear of losing customers.

Respondents to the ISM survey noted prices are “skyrocketing” and posing “major hurdles.” The prices component of the survey jumped to 87 in May from 84.5 in April, and Mr. Ore noted that doesn’t yet capture the full impact of rising oil prices.

Last week, Dow Chemical Co., one of the largest chemical manufacturers in the world, provided a glimpse of what may be ahead in announcing it is raising prices on products by as much as 20% to offset “staggering” energy costs.

It is far from clear, though, that consumers will accept price increases. “It is increasingly difficult to pass on commodity cost increases in a generally weak U.S. economy,” said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, a manufacturing trade group based in Arlington, Virginia. “This dynamic will lead to shrinking profit margins,” he warned.

The employment component of the ISM report rose in May, but was still below 50. On Friday, the government will release the May employment report, which will provide information on whether and how much the labor market is deteriorating.

Other components of the ISM showed little change. Inventories of manufacturers and their customers continued to shrink. Imports grew slightly. The backlog of orders dropped to 46 from 51.5, a sign of weakness ahead that firms hope will be offset by the growth in new orders last month.