Manufacturing in U.S. grew in January at slowest pace in a year

WASHINGTON – Factories expanded in January at the weakest pace in a year as orders cooled, a sign weakness in overseas markets is restraining U.S. manufacturing.

The Institute for Supply Management’s index dropped to 53.5 from 55.1 in December, a report from the Tempe, Arizona-based group showed Monday. The median forecast in a Bloomberg survey of 74 economists called for a decline to 54.5. Readings greater than 50 signal growth.

The plunge in oil prices is limiting sales at manufacturers such as Caterpillar Inc. while slower growth from Europe to China and the strengthening dollar represent another hurdle for American exports. At the same time, consumer spending that’s coming off the best quarterly gain since 2006 indicates U.S. production will probably hold up.

“What we’re seeing is a moderation rather than any major deterioration,” Gennadiy Goldberg, U.S. strategist at TD Securities USA LLC in New York, said before the report. “The weak global backdrop along with the stronger dollar is not very positive for U.S. exporters. We still have very strong domestic demand, which is a big positive.”

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Economists’ estimates in the Bloomberg survey ranged from 52 to 56.5. Readings greater than 50 indicate growth.

Elsewhere, factories in the U.K. expanded at a faster pace last month while manufacturing in China contracted. Markit Economics said Monday that its index of U.K. purchasing managers improved to 53 in January from 52.7 a month earlier. The Chinese government’s gauge dropped to 49.8 from 50.1 in December, a report showed Feb. 1.

Orders cool

The ISM group’s measure of new orders declined to 52.9 in January, also the weakest reading in a year, from 57.8 at the end of 2014. The index has dropped about 10 points since October.

The gauge of export orders fell to 49.5 in January, the first time since November 2012 that demand from overseas customers shrank. Order backlogs were the weakest since July 2013.

The ISM’s factory employment measure decreased to 54.1 in January from 56 the prior month, while the production gauge eased to 56.5 from 57.7 in December.

A gauge of factory inventories rose to 51 in January from 45.5 a month earlier and an index of customer stockpiles fell to 42.5 from 44.5.

Prices paid

The report also showed the index of prices paid deteriorated to 35, the lowest since April 2009, from 38.5.

The U.S. expansion is being driven by growth in household purchases. Consumer spending, which accounts for almost 70 percent of the economy, grew in the fourth quarter at a 4.3 percent annualized pace, the most since 2006, Commerce Department data showed last week. The economy advanced at a 2.6 percent rate.

Last year marked the biggest increase in employment since 1999, and gasoline prices are running at the lowest level since 2009, boosting demand and helping lift consumer sentiment to an 11-year high, based on the University of Michigan index.

“Economic activity has been expanding at a solid pace,” the Federal Reserve said in a statement on Jan. 28 as it maintained its pledge to be “patient” on raising interest rates. “Labor market conditions have improved further, with strong job gains and a lower unemployment rate.”

Equipment demand

While good news for American households, some companies are feeling the pinch from the slump in oil prices. At Caterpillar, the world’s largest mining and construction equipment manufacturer, lower oil and gas prices are “without a doubt” the biggest reason the Peoria, Illinois-based company expects sales will decline in 2015, Michael DeWalt, vice president of finance services, said on a Jan. 27 conference call.

“With oil this low, we expect substantial reductions” in spending by fuel producers, he said.

Slowing global markets aren’t helping either. The International Monetary Fund in January made the steepest cut to its world growth outlook in three years, with diminished expectations almost everywhere except the U.S. The world economy will expand 3.5 percent in 2015, down from the 3.8 percent pace the lender projected in October. It also reduced forecasts for growth next year.

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