Manufacturing Grew at Slower Pace in May

Updated from 11:21 a.m. EDT

Activity in the nation's factories continued to grow in May, yet at a slower pace than in recent months, as new orders for manufactured goods moderated and upward pressures for raw materials prices eased, the National Association of Purchasing Management said Thursday.

The NAPM report on business, a broad measure of activity for the U.S. manufacturing sector, dropped to 53.2 in May, compared to 54.9 in April. While a reading above 50 denotes growing business for manufacturers, the decline in May suggests that growth in factory activity is slowing.

The index fell below the Reuters consensus forecast of economists, which had anticipated a 55.3 reading. That helped to boost U.S. financial markets Thursday, as investors interpreted the data as a suggestion that the six short-term interest rate hikes by the Federal Reserve are slowing the economy, and that future rate increases may not be as extensive as previously thought.

In midday trading, the Dow Jones Industrial Average was 125 higher, while the Nasdaq Composite Index rose 155. The benchmark 10-year bond was up 21/32 at 102 9/32 to yield 6.169%.

The report showed a sharp deceleration in the recent rapid rise in costs for input prices that manufacturers pay for raw materials and energy. The NAPM price index dropped to 65.8 in May from 76 in April and 79.8 in March. That means manufacturers, who have been struggling with higher prices for commodities, energy and wholesale goods, might be starting to get some relief.

Many economists and policymakers have feared that increased commodity, energy and wholesale costs in recent months could lead to a broader outbreak of inflation as manufacturers pass the costs on to their customers.

"Most of the decline in price pressure is related to oil prices and energy prices. Even though oil prices rose from April, it was not with the same intensity as we saw in March, and energy wasn't as much as a burden for manufacturers," said Kevin Logan, senior U.S. economist at Dresdner Kleinwort Benson.

He added, however, that factories are likely to continue feeling some degree of price pressure as many commodities remain in short supply. The NAPM report noted several commodity shortages, including such widely-used products as electronic components and wood pulp. The report also stated prices are increasing for aluminum, chemicals, corn and copper, among others.

"Though there is still significant pricing power in many of the basic commodities, the decline in the rate of acceleration of the prices index in April and May continues to be viewed as positive and ultimately should reduce the upward pressure on prices," said Norbert J. Ore, chair of the NAPM business survey committee.

The report also showed a marked decline in the pace of domestic orders for manufactured goods being submitted to factories. The new orders index fell to 51.1 in May from 56.3 in April, and indication that activity could continue to slow as businesses brace for slower economic times by reducing their inventories.

The decline in new orders echoed other recent reports that show signs of slowing demand by U.S. businesses and consumers. A recent report from the Commerce Department showed a sharp 6.4% decline in April for orders for big-ticket items meant to last for three or more years, known as durable goods.

But export orders from U.S. factories continued to rise in May as overseas economies continue to rebound. NAPM's new export orders index jumped sharply to 56.3 from 50.7 in April. That indicates that as demand moderates in the U.S., the impact on manufacturers will be offset by a growing amount of products going overseas.

Overall, economists say that the manufacturing sector will likely remain healthy despite slower growth.

"Manufacturers had an incredible run in the second-half of 1999 and early 2000, and all we are seeing now is a little bit of a turnaround but not necessarily a contraction" said Logan.