Thursday August 1, 12:14 pm Eastern Time Reuters Business Report Manufacturing Growth Nearly Halts in July By Ross Finley
NEW YORK (Reuters) - U.S. manufacturing growth nearly ground to a halt in July, a report said on Thursday, showing the economy has cooled significantly from earlier this year and raising concerns that the recovery could be in jeopardy. ADVERTISEMENT The Institute for Supply Management said its monthly manufacturing index fell in July to its lowest level since January, down to 50.5 from 56.2 in June. While that was the sixth straight month of growth, the index showed manufacturing was barely expanding, at a level just above 50. The fall was much sharper than Wall Street expected and was a major slowdown from June, which saw the fastest growth in more than two years. Manufacturing makes up about one-sixth of the economy. "There's no question that the slowdown in manufacturing will keep the economic recovery at a slow pace," said Christopher Low, chief economist at FTN Financial. "This is not a pretty report." The weak report raised concerns that the Federal Reserve, already expected to leave interest rates pat until next year, may need to ease credit costs further to support the flagging economy. That gave a lift to interest-rate sensitive Treasury securities while stocks extended earlier losses. A punishing stock market sell-off in July had caused businesses to slam on the brakes after a boost of confidence about growth prospects earlier in the year, said Norbert Ore, head of the ISM committee that compiles its monthly manufacturing survey, in a teleconference with reporters. Battered down by earnings worries and corporate accounting scandals, stocks fell through July to strike their lowest level in five years before rebounding slightly. That weighed on manufacturers' confidence as they watched stocks fall. "People got very conservative," Ore said. PRODUCTION, NEW ORDERS DOWN After a powerful run-off of inventories left over from boom times, factories rapidly boosted production earlier this year to meet rising demand. But as businesses became more conservative about the outlook for demand, they scaled back production. The ISM Production Index fell off sharply to 55.7 in July from 61.4 in June. And in a sign that production is likely to fall further in future months as factories curtail inventory-building, the New Orders Index, which measures future demand for goods, fell more than 10 points in July to 50.4 from 60.8. With fewer goods coming off assembly lines and orders drying up, factories also accelerated layoffs during the month, extending a trend seen since mid-2000 that has seen about 1.8 million factory workers lose their jobs. The ISM Employment Index fell in July to 45.0 from 49.7 in June, its 22nd straight month below 50. While economists cautioned that July is typically a slow month for factories, it still raised concerns that a government monthly report on employment across the nation, due on Friday, may be weaker than expected. "I'm waiting for confirmation from the labor markets as to whether the business sector is turning more cautious," said Alan Levenson, chief economist at T. Rowe Price Associates in Baltimore. PRICES CREEPING HIGHER Prices paid by manufacturers rose for the fifth straight month to their highest level in two years, boosting ISM's Prices Index to 68.3 in July from 65.5 in June. ISM's Ore said that while he was not worried about the recent price rises, they could be a problem if they persist. "It would be a greater concern to me in future months if we didn't see some moderation in prices," Ore told reporters. Recent rises in prices have stemmed in part from U.S. tariffs on foreign steel and rising export demand thanks to a roughly 10 percent slide in the dollar against major world currencies this year. But ISM's new export orders index fell in July to 52.2 from a two-year high of 54.5 in June. Tempe, Arizona-based ISM bases its manufacturing index on data provided monthly by purchasing executives at over 350 industrial companies and reflects changes in the current month compared with the previous month.
