U.S. Manufacturing Slips as Inflation Gauge Surges - 060308

http://www.nytimes.com/2008/06/03/business/03econ.html?pagewanted=print

June 3, 2008
U.S. Manufacturing Slips as Inflation Gauge Surges
By REUTERS
United States manufacturing declined in May for the fourth consecutive month while inflation surged to the highest in four years, heightening fears of stagflation.

Combined with data on inflation, the manufacturing report fed concerns about rising prices in a weak economy, especially after the price of oil hit a record high last month above $135 a barrel.

The Institute for Supply Management said its index of national factory activity rose to 49.6 in May, from April’s 48.6. That was slightly above market expectations, but the index remained below the level of 50 that signals contraction.

“These are mildly contractionary readings on manufacturing activity, rather than outright recession signals, although they are accompanied by ugly readings on cost inflation pressures,” analysts at Bear Stearns said in a note to clients.

The institute report showed a worrying trend for inflation in the United States. Its index of prices paid jumped to 87.0 — the highest since April 2004 — from 84.5 in April.

This year’s manufacturing downturn is the worst since the February-to-June period in 2003, and comes as the deepest housing slump since the Depression has weakened the broader economy.

A separate report showed that construction spending fell less than expected in April. This added weight to the argument that the economy is weak but may not be in recession.

The contraction in the May supply management index was the fifth in six months, but the weak dollar has bolstered exports, helping to ease damage to the factory sector.

The index of new export orders rose to 59.5, up from April’s 57.5 and the highest since May 2004, when it was at 60.0.

Construction spending fell 0.4 percent in April on continued deterioration in the residential sector, but outside of home building, private spending rose for the third month in a row.

Economists polled by Reuters ahead of the Commerce Department’s report were expecting a 0.6 percent decrease in construction spending, after a 0.6 percent decrease in March that was first reported as a much bigger 1.1 percent decline.

The factory sector also struggled abroad. Manufacturing in the euro zone cooled more in May as output remained near a three-year low.

The RBS/NTC Eurozone Purchasing Managers Index for the manufacturing sector eased to 50.6 in May, down from April’s 50.7 but above the earlier estimate of 50.5, which was also the median number forecast by economists.