News Article | 8/3/2009

U.S. Manufacturing Almost at Growth Stage

The U.S. factory sector moved within striking distance of growth in July, a survey showed on August 3 in another encouraging sign for the recession-gripped economy.

The Institute of Supply Management said its index of the manufacturing sector, also known as the purchasing managers (PMI) index, rose to 48.9% from 44.8% in June.

That figure was better than the level of 46.5% expected on Wall Street and closer to the 50% level that separates expansion and contraction.

The ISM said that although the factory sector contracted for an 18th consecutive month, the decline was modest and suggested the slump is ending. “It would be difficult to convince many manufacturers that we are on the brink of recovery, but the data suggests that we will see growth in the third quarter if the trends continue,” said ISM survey chief Norbert Ore.

“The solid increase in July’s production reflects reopening of auto plants that were closed during GM’s bankruptcy, which results in associated increases in auto parts production. The ‘cash-for-clunkers’ program appears to be more popular than most analysts projected, which indicates that the long, deep recession has created pent up demand for motor vehicles, ” said Daniel J. Meckstroth, Chief Economist for the Manufacturers Alliance/MAPI.

“In addition, although the inventory liquidation is probably not over in the manufacturing sector, a reduced pace of inventory cutting does increase production,” he added. “The July ISM reports adds to a growing number of indicators that signal that manufacturing and the general economy is bottoming out and a recovery is coming this summer. Although a welcome relief, we believe that the recovery will be below average and it will take many years to reach the pre-recession production level.”

Additionally, the survey showed the new orders and production sub-indexes growing, and that the headline index was pulled down by weakness in inventories and lingering declines in employment.

The new orders index increased to 55.3% from 49.2%, showing growth in factory orders.

The production sub-index climbed to 57.9% from 52.5%, suggesting accelerating activity.

The employment index was at 45.7%, still contracting, but better than the level of 40.7% in June.

The ISM said six of the 18 manufacturing industries reported growth in July — nonmetallic mineral products; paper products; printing and related activities; electrical equipment, appliances and components; transportation equipment; and chemical products.