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Manufacturing sector extends growth streak

The nation’s manufacturing sector extended its growth streak in August, but its pace was not as robust as July’s, in part because of rising energy prices.
/ Source: The Associated Press

The nation’s manufacturing sector extended its growth streak in August, but its pace was not as robust as July’s, in part because of rising energy prices. A drop in new orders indicated a possible slowing of business ahead.

The Institute for Supply Management, which issued its monthly report on the U.S. economy’s industrial sector Thursday, said its manufacturing index was at 53.6 percent in August, down from July’s 56.6 percent. While U.S. manufacturing grew for the 27th consecutive month, executives expressed concerns about whether the growth can be sustained amid the persistent rise in energy prices.

The index is compiled from a survey of purchasing executives in more than 400 industrial companies across the country. It was conducted before Hurricane Katrina devastated the Gulf Coast this week, and does not reflect the fact that many companies are in the process of revising their outlooks for the coming months. Economists are already predicting that the storm and resulting higher energy prices will hurt the manufacturing sector.

A reading above 50 indicates the sector is expanding; below 50 indicates manufacturing activity is shrinking.

“Business is extremely strong, but energy volatility is playing havoc with planning and pricing scenarios,” the report said, citing executives within the chemicals industry. A respondent whose company is involved with electronic components and equipment expressed concern “with oil prices and the impact on products that we buy.”

“This month’s comments from supply managers indicate great concern over recent new highs in the energy commodities,” Norbert Ore, chair of the ISM manufacturing business survey committee, said in a statement. “Many express concerns as to whether current business strength can be sustained if high energy prices persist.”

One of the ISM index’s components, prices that manufacturers paid for goods, surged to 62.5 from July’s 48.5, reflecting higher energy costs. Executives with tobacco, transportation and equipment, chemicals, rubber and plastics industries were among those reporting higher prices.

Meanwhile, ISM’s new orders index was 56.4, down from July’s 60.6. New orders are a leading indicator, and a drop could portend a slowdown in production over coming months.

“Clearly shipments of energy related products, and therefore orders of those products, will be adversely affected by Katrina,” said Jerry Zukowski, deputy chief economist at Nomura Securities International Inc. He warned that the hurricane’s damage will impact “a wide spectrum of (economic) statistics” in coming months.

Chris Low, chief economist at FTN Financial, said of the ISM report, “oil had a measurable impact on prices paid before the storm. Given the fact that we are now seeing energy supply interruptions the prices paid index will almost certainly be back above 70 next month, and its very likely the headline index will fall further on weakness in both production and orders.”

Wall Street, which was contending with a variety of economic data as well as the aftermath of Katrina, was narrowly mixed Thursday. The Dow Jones industrial average was up 2.31, or 0.02 percent, at 10,483.91.

ISM’s production index was at 55.9 in August, down from July’s 61.2.

“The (production) levels in July were too high for the reality of what is truly going on in manufacturing. The move back in August is to a more realistic level,” said Stephen Stanley, chief economist at RBS Greenwich Capital.

Industries reporting growth in August included textiles, electronic components and equipment, glass, primary metals, wood and wood products.

At the same time, the ISM said its employment index dropped to 52.6 from 53.2 in July. ISM’s supplier deliveries gauge fell to 50.5 from 51.8, and inventories fell to 45.7 from 47.5.