U.S. Manufacturing Shrank in August, ISM Index Shows

By Bob Willis

Sept. 2 (Bloomberg) -- An index of manufacturing in the U.S. fell in August for the first time in three months as companies slowed production and cut payrolls in the face of weakening consumer spending.

The Institute for Supply Management's factory index fell to 49.9 last month from 50.0 the prior month, the Tempe, Arizona- based group reported today. The ISM gauge has hovered near 50, the dividing line between expansion and contraction, for the past year.

Manufacturers are receiving fewer orders as tumbling home prices and expensive gasoline weigh on consumer demand. Surging exports are keeping factories from stumbling as the broader economy slows.

``Manufacturing has been rather flat,'' said Norbert Ore, chairman of the ISM survey, in a conference call from Atlanta. ``It's a consistent story of slow contraction that's been going on for quite some time.''

The ISM index was projected to remain unchanged at 50, according to the median of 72 economists' forecasts in a Bloomberg News survey. Estimates ranged from 48.5 to 52.

The purchasing managers' gauge of new orders for factories increased to 48.3 from 45 the prior month, when it reached its lowest level since October 2001. The production measure dropped to 52.1 from 52.9.

Export Orders Jump

Orders from overseas have helped some companies withstand slower U.S. sales. The group's export gauge jumped to 57 from 54 the prior month.

The employment index dropped to 49.7 from 51.9 in July, further signs of weakness in factory employment. Ford Motor Co., the second-largest U.S. automaker, last month said it would lay off 300 workers at a Michigan engine factory as demand dwindles for vehicles equipped with V-8 engines because of gasoline prices.

The purchasing managers' index of prices paid dropped to 77 from 88.5.

A government report today showed construction spending in the U.S. fell more than economists forecast in July as work slowed on homes, power plants and factories, a government report showed.

Construction Spending Declines

The 0.6 percent decrease followed a revised 0.3 percent gain that initially was reported as a 0.4 percent drop, the Commerce Department said today in Washington. Private residential projects declined 2.3 percent in July to the lowest level since March 2001, the start of the country's last official recession.

The economy will grow at an average 0.7 percent pace in the second half of the year, economists surveyed by Bloomberg News forecast in the first week of August. Last week, the government reported the economy grew at a better-than-forecast 3.3 percent annual rate in the second quarter, following 0.9 percent in the first three months of the year.

The smallest trade deficit in eight years was the biggest contributor to growth last quarter. The smaller gap added 3.1 percentage points to growth, the most since 1980. That is likely to diminish as overseas economies slow and the dollar strengthens.

Manufacturers have also turned cautious as consumer spending weakens with the fading effects of tax rebate checks. Tumbling house prices and gasoline that topped $4 a gallon two months ago are also holding back consumer demand.

The auto industry is at the forefront of the manufacturing slump. Sales of cars and light trucks in July slid to a 12.5 million annual rate, the lowest level since 1993, according to industry figures.

General Motors Corp. Chief Executive Officer Rick Wagoner said Aug. 16 he's not yet seeing signs of a recovery in the U.S. economy or in vehicle sales.

The sluggish economy helped push GM, the world's largest automaker, to a $15.5 billion loss in the second quarter. ``It still feels to me like we're in it,'' Wagoner said of the economic slowdown.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net