Economy: Small Comfort in Manufacturing Uptick

An unexpected spurt in manufacturing activity is doing little to dispel the gloom that envelopes the U.S. economy midway through the year.
Last week, the private sector Institute for Supply Management (ISM) bucked economists' expectations and said the manufacturing sector last month clawed its way back to positive growth.

The ISM's manufacturing index rose to 50.2 in June, up from the May reading of 49.6. Economists polled by news and business organisations had expected a reading of around 48.6. Anything above 50 reflects growth in the sector; anything below it indicates contraction.

"The manufacturing sector showed a slight improvement in June as the [index] registered above 50 percent after four months of decline," said Norbert Ore, chairman of the ISM's manufacturing survey committee.

In particular, the index showed that exports in June continued to grow. Although exports slipped between May and June -- from 59.5 to 58.5 -- the reading remained decidedly positive, and consistent with a five-year expansion in U.S. exports.

These gains were insufficient to obscure other troubling trends, however.

Imports fell to 46 in June from 49.5 the previous month. This might sit well with some economic nationalists but because so much of what U.S. citizens consume is made elsewhere, most economists fear dwindling imports reflect weak domestic demand -- a serious problem in a country dependent on consumption for more than two-thirds of economic growth.

The ISM also found that new orders for manufactured goods, another key indicator of demand, fell in June for the seventh consecutive month.

Additionally, the purchasing managers' association said it is proving increasingly expensive for manufacturers to turn out new goods amid rising prices for fuel and all raw materials except copper. Indeed, the ISM's measure of manufacturers' materials costs rose to its highest level since July 1979.

"When viewed from the manufacturer's perspective, they are experiencing higher prices for their inputs while demand for their products is slowing," Ore added.

In other words, profits are being squeezed. This usually spells bad news for workers, and the ISM found that manufacturing jobs shrunk in June for the eighth month in a row.

The U.S. Labor Department is due to release its latest jobs report on Thursday. On the same day, the ISM is to issue its latest survey of the vast U.S. services sector.

Adding to the gloom on Tuesday, leading U.S. automakers posted double-digit declines in sales, to 15-year lows. High petrol prices, they said, have forced consumers to leave gas-guzzling vehicles in the garage. Additionally, many would-be customers report difficulty in getting credit for car loans.

Ford Motor said sales of its Ford, Lincoln, Mercury, and Volvo brands plunged by 28.1 percent in June, compared to the previous June. The declines were driven by weak sales of trucks and sport-utility vehicles (SUVs), until recently symbols of U.S. triumphalism.

Sales of Ford SUVs plummeted 55 percent, followed by trucks and vans (37.8 percent), crossover utility vehicles (15.8 percent), and cars (12 percent).

General Motors said its overall sales dropped by 18.5 percent in the year through June.

Apart from high fuel prices, executives saw broader economic insecurity and low consumer morale hindering their prospects.

"The economy enters the second half of the year with a notable absence of momentum and a high degree of uncertainty," said Ford vice president James Farley.

The administration of President George W. Bush has been eager to show that its economic stimulus package passed in February with Republican and Democratic support in Congress, and consisting mainly of tax rebates, has boosted consumer spending. Some economic data show this to be the case but government and private analysts alike have warned that the effect will be short-lived and could prove inadequate.

These warnings, coupled with election-year pressures, have moved leaders in the Senate and House of Representatives to mull another emergency spending bill. Details have yet to emerge but proposals reportedly include billions of dollars for roads, bridges, and other infrastructure.

Priorities also include more money for disaster relief, law enforcement, and efforts to help low-income families to pay their heating and cooling bills, Harry Reid, the Democratic Senate majority leader, told reporters last week.

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