Manufacturing sector growth slows in September

Monday, October 2nd 2006, 10:26 am

By: News On 6

NEW YORK (AP) _ The nation's manufacturing sector expanded at the slowest pace in over a year in September amid weaker U.S. auto sales and a slumping housing market, a trade group said Monday.

The Institute for Supply Management, based in Tempe, Ariz., said its manufacturing index registered 52.9 in September, below August's reading of 54.5 and the lowest reading since May 2005.

Analysts had been expecting a reading of 53.5.

A reading of 50 or more indicates expansion, while below 50 shows contraction. The September figure represented the 40th consecutive month of growth.

The manufacturing sector's strength is waning after performing well in the first half of the year, said Dan Meckstroth, chief economist for the Manufacturers Alliance/MAPI trade group in Washington, D.C.

``For the first two quarters of the economy, you had manufacturing growth exceeding the growth of the general economy. That's unusual,'' Meckstroth said. He said a big reason was that companies wanted rebuild their inventories after last fall's hurricanes. Inventories are ample now, and business is slowing down.

The ISM's prices paid index fell to 61.0 in September from 73.0 in the previous month as commodity prices took a tumble. The new orders index stayed the same at 54.2, but the backlog of orders index fell to 46.5 in September from 51.5 a month earlier. Also, the employment index dropped to 49.4 in September from 54.0 in August.

The struggling U.S. auto industry and the cooling housing market are hurting the business of the companies that supply those sectors.

Automakers General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler Group are cutting back production. The auto industry accounts for about 10 percent of the nation's manufacturing, Meckstroth said.

On Friday, Timken Co., which makes bearings and alloy steel products, said it is slashing its earnings outlook and 700 jobs because of the weakening U.S. auto market. Earlier last week, Visteon Corp. said it expects second-half product sales to be about 10 percent lower than its first-half product sales of $5.7 billion.

Also in September, the auto supplier BorgWarner Inc. said it would eliminate 13 percent of its North American work force and reduced its 2006 earnings forecast, while Lear Corp. said the slowdown in U.S. vehicle production would cost it about $300 million in lost sales for 2006.

Meanwhile, the housing market has been leveling off. Home sales rose in August, but only after three straight months of declines, the Commerce Department said last week. The price of homes sold in August was down 1.3 percent from a year earlier _ the biggest year-over-year price decline in more than three years.

Furthermore, although falling commodity prices have been a relief for consumers, the lower prices are hurting some manufacturers _ if they've stocked up on a once-expensive commodity that can now be bought at a cheaper price, it's a capital loss, Meckstroth explained.

Oil prices have fallen about 20 percent since mid-July.

Equipment manufacturing, however, remains a bright spot on the manufacturing landscape. Last month, heavy equipment maker Caterpillar said it would raise its machinery and engine prices early next year, citing a global upswing in construction, mining and energy exploration. The unofficial monthly dealer statistics on its Web site show that sales were up in August from the previous month.

Stock prices were mixed in morning trading Monday on Wall Street. The Dow Jones industrials rose 6.16 points, or 0.05 percent, to 11,685.23, while the Nasdaq composite index fell 4.06 points, or 0.18 percent, to 2,254.37. The broader Standard & Poor's 500 index fell 0.25 points, or 0.02 percent, to 1,335.63.

With the economy slowing, the Federal Reserve on Sept. 20 decided for the second month in a row to leave interest rates unchanged. The Fed's rate-raising campaign, which lasted for more than two-year, was aimed at curbing inflation.

Economists are mixed on what the Fed will do at its meeting later this month, but inflation worries _ which eased when energy prices started tumbling in late July _ reared up again on Friday, when the Commerce Department reported that core inflation rose in August. The 2.5 percent rise in this measure over the past 12 months was the biggest year-long increase since a similar 2.5 percent 12-month rise in April 1995.

Inflation, along with the slowing housing market and energy prices that are still high relative to years past, has been cutting into consumer spending, which showed a tiny 0.1 percent rise in August _ far below the 0.8 percent jump in the previous month, the Commerce Department said Friday.