Signals mixed; demand is off

Staff -- Purchasing, 8/11/2005

Indicators of the health of the manufacturing economy are mixed this summer. Overall growth is reported by the national media as robust, powered by a strong U.S. economy—pinned to a final reading for annualized gross domestic product (GDP) growth in the first quarter of 3.8%. The Conference Board index of consumer confidence rose again in June to 105.8, a three-year high, from May's upwardly revised 103.1. The Institute of Supply Management's index rose more than two points to 53.8 in June on the strength of healthy gains in new orders, production and employment. However, Purchasing magazine's more-narrow composite business index for July of 50.7 was barely above the 50 growth/no growth barometer. This is only the second time in the past nine months that purchasing managers have projected growth ahead. The metalworking sector has been unable to overcome the twin hurdles of falling demand and soaring energy prices—even with a decline in the costs of many raw materials. And there are signs still of a retrenchment in industrial production this summer or autumn. Note that the Manufacturers Alliance/MAPI composite index showed only a slight decline, falling to 68 in June after a reading of 71 in March. The quarterly survey (released in mid-July) is still pointing to an expansion of manufacturing activity in the coming quarter, albeit at a slower pace than was expected three months ago. Industrial production rose 0.9% in June. However, most of the increase was due to a 5.3% jump in production by utilities. Manufacturing output increased a more modest 0.4%. Capacity utilization rose to 80% overall, as earlier shutdowns of inefficient capacity began to take effect. New orders for manufactured goods increased 2.9% over the month in May, in line with consensus expectations. The previously released 5.5% increase in durable goods orders was unrevised and nondurable goods orders advanced 0.1%.