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U.S. Manufacturing Shrank in June

02/07/2003 15:22
U.S. manufacturing activity contracted in June for the fourth month in a row, but it did so only slightly while a rising number of new orders indicated the sector will expand in the second half of the year, the Institute for Supply Management reported yesterday.

The ISM's monthly index of conditions in the factory sector rose to 49.8 last month from 49.4 in May. A reading below 50 indicates that the sector is shrinking; a reading above 50 indicates expansion.

Meanwhile, domestic automakers reported selling new cars and light trucks at a seasonally adjusted annual rate of roughly 13 million last month, up slightly from the pace of April and May. The sales exceeded most analysts' estimates, but they were helped by various incentives that industry experts valued at $3,000 to $4,000 per vehicle.

The two reports were among several in recent weeks that have suggested that the economy has stabilized and may be poised for a pickup after periods of weakness before and during the war in Iraq.

"The economy is not only rising -- an ISM reading above 42.9 is consistent with an expanding economic pie -- but its momentum is building," said Ken Mayland of ClearView Economics in Cleveland. "Still, with the end of the war and the passage of major new tax cuts, it's a big disappointment that the bounce-back is so muted."

The income tax cuts enacted a few weeks ago will be showing up in workers' take-home pay beginning this week, and late this month the Treasury Department will begin mailing checks to many taxpayers of $400 per child, reflecting an increase in the child tax credit to $1,000 this year from $600. The checks will be based on information from tax returns filed for last year.

The Federal Reserve also sought to boost the economy further last week by cutting its target for overnight interest rates a quarter-percentage point, to 1 percent, the lowest level since a few weeks in 1961.

On the job front, Challenger, Gray & Christmas Inc. said its monthly compilation of layoff announcements by U.S. firms showed 59,715 jobs cut last month, the fewest since November 2000. The figure was 13 percent lower than May's and was more than a third smaller than in June 2002. Nevertheless, fewer layoffs don't necessarily mean more hiring, but rather that companies "are simply staying with the workers they have, resulting in a stagnant job market," the firm cautioned

Norbert J. Ore, who heads the Institute for Supply Management's business survey committee, said that last month's results show that "while the overall economy appears to be in a recovery, the manufacturing sector failed to grow in June." But the separate indexes for new orders, production and new export orders, all of which were above 50 in May and rose last month, were "encouraging as it appears that manufacturing is positioned for a recovery in the second half."

"The mood of the survey respondents has definitely turned upbeat," Ore added.

Jerry Jasinowski, president of the National Association of Manufacturers, said the report "showed no real improvement in the overall state of manufacturing last month," but he added that the orders figures were heartening. "These indicators confirm what we have been hearing from our members," he said.

Meanwhile, the Commerce Department said that construction spending fell 1.7 percent in May instead of increasing slightly as many analysts predicted. Both private and public construction declined, as did residential construction despite the strength in the housing market. The overall monthly construction drop was the third in a row.

In some parts of the East, including the Washington area, heavy rain in May delayed some construction, particularly on new homes. But high vacancy rates have depressed office and store construction, and excess production capacity has held down construction of new factories. In addition, said Scott Winningham of Stone & McCarthy, a financial markets research firm, "the growing fiscal problems at the state and local level, and the associated cutbacks in spending may be responsible for the recent weakness in public construction spending."