Manufacturing remains sluggish in May

June 2, 2008 8:40:30 AM PDT
A private trade group said Monday manufacturing activity contracted in May, hobbled by rising costs and weak consumer demand. The reading of 49.6 for the overall index from the Institute for Supply Management was up from 48.6 percent in April. It beat economists' expectations of 47.9, according to the consensus estimate of Wall Street economists surveyed by Thomson Financial/IFR, but it was still below a reading of 50, signaling contraction.

The manufacturing sector has failed to grow for the last four months, as the index has hovered near its lowest level in five years.

"Manufacturers find themselves caught between rising costs and weakening demand in many industries," Norbert J. Ore, chairman of ISM's manufacturing business survey committee, said in a statement accompanying the report. "Exports continue strong due to the weak dollar - without the weak dollar the story would be much more negative in manufacturing."

John Silvia, chief economist at Wachovia Corp., said, "It's exports, and, of course, government spending, that's keeping us above water."

Stocks fell in morning trading after the Commerce Department reported data showing construction spending dipped in April for the sixth time in seven months. The ouster of Wachovia Corp.'s chief executive also weighed on shares.

The Dow Jones industrial average fell 151.20, or 1.2 percent, to 12,487.12. The Standard & Poor's 500 fell 14.59, or 1.04 percent, to 1,385.79 and the Nasdaq composite fell 28.35, or 1.12 percent, to 2,494.31.

The ISM said on Monday that its index of prices rose to its highest since April 2004. Prices climbed for all commodities except zinc and methanol, a building block for chemical products from construction materials to windshield washer fluid.

In another troubling sign, order backlogs, an indication of future work, fell 5.5 percentage points lower than April.

Recent economic data has been anemic, but not terrible, however. That has prompted some economists to say the nation may avoid a long and deep recession.

Monday's manufacturing data is "not a number that gives you a clear signal that things are going to improve dramatically, but given the overall report, it gives you some optimism," said Oscar Gonzalez, an economist, John Hancock Financial Service. "At least by this report, the economy is not heading into a severe recession."


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