U.S. manufacturing probably stagnated as spending cooled

MANUFACTURING in the U.S. probably stagnated in July after contracting for the first time in three years, economists said before a report today. / BLOOMBERG FILE PHOTO/TY WRIGHT
MANUFACTURING in the U.S. probably stagnated in July after contracting for the first time in three years, economists said before a report today. / BLOOMBERG FILE PHOTO/TY WRIGHT

WASHINGTON – Manufacturing in the U.S. probably stagnated in July after contracting for the first time in three years, economists said before a report today.

The Institute for Supply Management’s factory index rose to 50.2 last month from 49.7 in June, according to the median estimate of 83 economists surveyed by Bloomberg News. Fifty marks the dividing line between expansion and contraction. Construction spending probably climbed in June for a third month, other data may show.

Factories may temper production as companies curb spending on concerns lawmakers will fail to act before automatic government spending cuts and higher taxes go into effect next year. Cutbacks in household purchases, Europe’s debt crisis and slower global growth threaten to further restrain an industry that’s been a source of strength for the economy.

“You can point to general uncertainty in the economy that’s caused households to increase their savings and caused businesses to be more cautious,” said Ellen Zentner, senior economist at Nomura Securities International Inc. in New York. “Businesses are reporting that their clients are waiting until the last minute to place orders.”

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While the economy has slowed for two straight quarters, Federal Reserve policy makers concluding a two-day meeting today will probably forgo announcing a third round of large-scale asset purchases, waiting instead until September, according to median estimates of economists in a Bloomberg survey.

Fed forecast

Eighty-eight percent said the Federal Open Market Committee will refrain from starting new purchases, according to the July 25-27 survey of 58 economists. Forty-eight percent said policy makers will announce the buying at its Sept. 12-13 meeting.

The Fed may take further action if the job market fails to make “sustained progress” in bringing down an unemployment rate stuck above 8 percent for 41 consecutive months, Chairman Ben S. Bernanke told Congress last month.

The Tempe, Arizona-based ISM’s factory figures are due at 10 a.m. New York time. Estimates in the Bloomberg survey ranged from 48.5 to 52.

At the same time, the Commerce Department in Washington may report a 0.4 percent increase in June construction spending after a 0.9 percent gain the prior month, according to the Bloomberg survey median.

U.K. manufacturing shrank last month by the most in more than three years, another report today showed. An index of factory output, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply fell to 45.4 from a revised 48.4 in June, London-based Markit said. European manufacturing

Euro-area manufacturing contracted for a 12th month in July, according to a separate report today. A gauge of manufacturing in the 17-nation region fell to a 37-month low of 44 from 45.1 in June.

In China, a measure of manufacturing dropped in July to an eight-month low. The Purchasing Managers’ Index unexpectedly fell to 50.1 in July from 50.2 a month earlier, according to the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing.

Manufacturing accounts for about 12 percent of the U.S. economy and has been a linchpin for the expansion that began in June 2009.

Regional reports last month indicated manufacturing was sputtering. A measure of manufacturing around Milwaukee, Wisconsin, shrank in July for the first time in three years. A gauge of Cincinnati, Ohio-area factories declined to the lowest level since October 2009. Reports from factories in Dallas and Richmond, Virginia, also showed contraction.

Chicago report

While the Institute for Supply Management-Chicago Inc.’s business barometer grew at a faster pace last month, the report showed slower production and employment growth.

“The underlying details were a touch on the soft side,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York. “The bottom line remains that manufacturing is still having a difficult time gathering steam.”

The Standard & Poor’s Supercomposite Machinery Index, which includes Caterpillar Inc. and Deere & Co., has lagged behind the broader market, rising 2.4 percent so far this year compared with a 9.7 percent gain for the S&P 500.

Cummins Inc. yesterday advanced the most in almost six months after the maker of diesel and natural gas engines posted a second-quarter profit that exceeded analysts’ estimates. The Columbus, Indiana-based company beat projections even as sales declined 4.1 percent from a year earlier. It forecast full-year revenue of $18 billion, which would be little changed from 2011.

Brazil, China

At the same time, “continued weakness in some international markets, particularly in Brazil and China, coupled with slowing orders in U.S. truck, oil and gas, and power generation, have caused us to lower our outlook,” Thomas Linebarger, chief executive officer, said on a conference call with analysts.

U.S. consumers are cutting back just as Europe’s debt crisis and looming U.S. tax-policy changes dent confidence. Household consumption, which accounts for about 70 percent of the economy, rose at a 1.5 percent rate from April through June, down from a 2.4 percent gain in the prior quarter, according to Commerce Department data.

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