Factories in U.S. expand at a more sustainable pace

WASHINGTON – Manufacturing moderated at the end of last year to a more sustainable pace of growth as U.S. factories adjusted to weaker overseas markets and steady demand from domestic customers.

The Institute for Supply Management’s factory index dropped to a six-month low of 55.5, less than forecast, from 58.7 in November, a report from the Tempe, Ariz.-based group showed today. In October, the reading matched a three year-high.

Order growth slowed as some companies anticipated falling energy prices would allow them to receive finished products at a lower cost. While other customers scaled back capital spending plans with global markets cooling, production will probably hold up as employment gains and cheap gasoline boost consumer spending and the economy.

“It’s more of a pause that refreshes than anything to worry about,” said Michael Montgomery, a U.S. economist at IHS Global Insight in Lexington, Mass., who correctly forecast the ISM reading. “Manufacturing is going to keep expanding. We’ll lose some ground on exports,” though in the U.S., “demand is growing.”

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A separate index of U.S. manufacturing also fell in December. The Markit Economics gauge decreased to an 11-month low of 53.9 from 54.8 a month earlier.

U.S. factories remain a standout among global producers. Euro-area manufacturing held close to a 17-month low reached in November, the London-based group said today. The industry in China was the weakest in 18 months, according to the latest government index of factory purchasing managers.

Last year

ISM figures greater than 50 indicate growth and the median forecast in a Bloomberg survey of economists called for a December reading of 57.5. The purchasing managers’ index averaged 55.8 in 2014, the best in four years.

Stocks fell after the report, with the Standard & Poor’s 500 Index dropping 0.2 percent to 2,055.46 at 12:36 p.m. in New York.

Eleven of 18 industries surveyed by the purchasing managers’ group posted growth, led by printers, metal producers and furniture makers.

The December reading is a “still strong number,” Bradley Holcomb, chairman of the ISM factory survey, said on a conference call with reporters. The drop is “certainly nothing to be concerned about.”

Orders index

The ISM group’s new orders gauge declined to 57.3 in December, the weakest in seven months, from 66. Some chemical products makers said sales are slowing as customers reduce inventory in anticipation of lower prices.

Such delays in orders are unlikely to last, said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “You can only play that game for so long. When people have to order, they have to order.”

The group’s measures of production and order backlogs dropped, while an index of export demand suffered its biggest one-month decline in 2014. The factory employment measure increased from the prior month.

A slump in crude oil helped push down input costs for factories last month. The ISM’s index of prices paid declined to 38.5, the lowest since June 2012. Thirteen manufacturing industries reported paying lower prices in December, led by chemicals, primary metals and plastics.

Growth in the U.S. will probably keep orders flowing into factories in coming months. The economy expanded in the third quarter at a 5 percent annualized pace, the fastest since the three months ended in September 2003, according to Commerce Department data. Consumer spending, which accounts for almost 70 percent of the economy, grew at a 3.2 percent pace.

Employment, gasoline

More hiring and cheaper gasoline are helping drive Americans’ purchases. Carmakers are among manufacturers poised to keep benefiting. U.S. auto sales rose to an annualized pace of 17.1 million in November from 16.4 million a month earlier, based on data from Ward’s Automotive Group.

“By any measure, households are reaping significant disposable income gains each week at current gas prices,” Emily Kolinski Morris, Ford Motor Co.’s chief economist, told analysts and reporters on a conference call on Dec. 2.

At the same time, cooling overseas markets may hurt some U.S. producers. European Central Bank officials meet on Jan. 22 to consider steps to drive down borrowing costs and revive Europe’s economy. China is on course for the slowest year of growth since 1990, according to a Bloomberg survey. Russia, the world’s biggest energy exporter, this year is facing its first recession since 2009 amid plunging oil prices.

Joy Global Inc., the world’s largest maker of underground mining machinery, said it expects to see further declines in mining-industry investment during a “challenging” 2015.

“Many of our customers remain strained and are deploying capital only on quick-payback, highly profitable projects,” Ted Doheny, chief executive officer, said on a Dec. 17 earnings call.

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