U.S. Economy: Chicago Purchasing Manager Index Gains

By Timothy R. Homan

June 30 (Bloomberg) -- U.S. business purchases unexpectedly shrank at a slower pace in June, indicating a prolonged economic slowdown that isn't getting any worse.

The National Association of Purchasing Management-Chicago said today its business index increased to 49.6 this month from 49.1 in May. Fifty is the dividing line between growth and contraction.

``Although it's slightly higher than last month, it's still lower than we would like to see and suggests that we will be in a period of weakness for a while,'' said Jeffrey Roach, chief economist at Horizon Investments in Charlotte, North Carolina, who forecast the index would rise to 49.5.

The figures reflect an increase in consumer spending this quarter spurred by federal tax rebates, and record exports aided by a weaker dollar. At the same time, the report showed a fifth straight month of contracting activity, indicating no sign of a sustained acceleration in growth.

Treasuries were little changed after the report, and stocks recovered earlier losses. Yields on benchmark 10-year notes were at 3.97 percent at 4:16 p.m. in New York, the same as last week's close. The Standard & Poor's 500 Stock Index advanced 0.1 percent to close at 1,280.

Economists surveyed by Bloomberg News had projected the index would fall to 48, according to the median of 60 forecasts in a Bloomberg News survey. Estimates ranged from 46 to 51.

2007 Comparison

June showed the slowest pace of contraction since Chicago- area activity started shrinking in February. The index averaged 54.4 last year.

Consumer spending rose in May as households spent some of the more than $100 billion of tax rebates the government is distributing this year. Record gasoline costs, rising food prices and declining payrolls mean the boost may prove temporary, economists said.

``The fiscal stimulus is supporting the economy to some extent,'' said Ryan Sweet, an economist at Moody's Economy.com in West Chester, Pennsylvania. ``Beyond the rebates, spending is going to be very weak. Along with the other headwinds, the consumer faces potentially stronger inflation. That will sap household spending power.''

Foreign demand has helped manufacturing perform better than in previous economic downturns. Gross domestic product rose at a 1 percent annual pace in the first quarter, the Commerce Department said last week. The trade gap was $480.2 billion, the lowest since the third quarter of 2002, and contributed 0.8 percentage point to growth.

Harley-Davidson

Harley-Davidson Inc., the biggest U.S. motorcycle maker, this month said it expects to see an increase in foreign demand for the remainder of 2008.

``Given the strength we are seeing, we're going to continue to increase investment in international markets, and we're going to continue to increase shipments'' overseas, Chief Financial Officer Thomas Bergmann said in a June 19 interview with Bloomberg Television.

Consumer spending and personal income surged in May, a sign the biggest part of the economy is benefiting from the government tax-rebate checks.

The 0.8 percent rise in spending followed a 0.4 percent increase in April, the Commerce Department said last week. Incomes grew 1.9 percent, the most since September 2005.

The Chicago report's measure of new orders fell to 52, signaling smaller gains, from 56.1 in May. Order backlogs dropped to 42.3 from 46.8.

The Chicago group's employment index increased to 46.7 from 41.2 a month ago.

June Payrolls

The Labor Department is scheduled to release the June payrolls report on July 3. Manufacturers have lost jobs every month since July 2006.

Brunswick Corp., the maker of Sea Ray yachts and Boston Whaler fishing boats, last week said it will close four more North American plants and cut as much as 10 percent of staff to trim costs. The Lake Forest, Illinois-based company will have 17 or fewer plants at the end of 2009, compared with 29 in 2007.

The production gauge in today's Chicago report decreased to 45.1, the lowest reading since August 2001, from 51.5 in May. The group's inventories index rose to 50.5 from 42.2.

The purchasing managers' measure of prices paid for raw materials decreased to 85.5 from 87.5 the previous month.

Some companies are trying to pass on higher costs to customers. Dow Chemical Co., the biggest U.S. chemical maker, last week said it will raise prices as much as 25 percent in July to offset higher input costs. The increase is the largest in company history and the second in two months.

The Chicago purchasers' group surveys companies with U.S. and worldwide operations. Any group member, even those not located in the Midwest, can respond to the survey.

National Index

Economists monitor the Chicago index for an early reading on the outlook for U.S. manufacturing, which makes up about 12 percent of the economy. The Institute for Supply Management is scheduled to release its June manufacturing survey tomorrow.

Regional reports earlier this month showed manufacturing shrinking. The Federal Reserve Bank of Philadelphia's general economic index dropped to minus 17.1, a seventh month of contraction, from minus 15.6 in May. The New York Fed's measure fell to minus 8.7 from minus 3.2 a month earlier.

Other releases indicate the slowdown in manufacturing. Excluding orders for cars and planes, which tend to be volatile, bookings for durable goods declined 0.9 percent in May, the first drop in three months, the Commerce Department said last week.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net