Pace of GrowthIn ManufacturingSlowed in April - May 3, 2005

May 3, 2005Economy-->
Economy
By KEMBA J. DUNHAM Staff Reporter of THE WALL STREET JOURNAL
In the latest sign that U.S. economic activity is moderating, the Institute for Supply Management reported that the manufacturing sector grew in April at the slowest pace in nearly two years.
The ISM, which polls purchasing managers at more than 400 industrial companies, said its index of manufacturing activity slipped to 53.3 last month, down from 55.2 in March and 55.3 in February. April was the fifth consecutive monthly decline in the index, which peaked at 61.6 last July and has trended lower ever since. A reading above 50 indicates that the manufacturing sector is expanding; a reading below 50 indicates that the sector is contracting.
While the decline in the ISM index was widely viewed as disappointing news, some economists were quick to note that the reading doesn't mean that the economy is heading for recession. "The current ISM number is down quite a bit, but it's still pretty good and consistent with pretty decent growth in the economy," says Joel Naroff of Naroff Economic Advisors Inc. in Holland, Pa.
Norbert Ore, chairman of the ISM's survey committee, also down played the recent decline. He said that after 23 consecutive months of expansion in the manufacturing sector, a slowdown was inevitable. "It's important to note it's the longest run of growth in manufacturing in 16 years," he said. "There has to be some expectation that the rate of growth will decline." He attributes the slowdown to a decline in demand for durable goods and to inventory excess in the automotive sector. The new-orders index, for example, fell to 53.7 in April from 57.1 a month earlier.
The ISM index is closely watched by economists and investors because it provides an early look of economic activity in the preceding period and tends to track changes in the health of the U.S. industrial core. But it isn't clear whether the report will have any influence on members of the Federal Reserve's Open Market Committee, who are scheduled to meet today to map out monetary policy. The central bank is widely expected to raise the target for the federal-funds rate, charged on overnight loans between banks, to 3% from 2.75%. While the economy appears to have softened in recent months, Fed officials seem to be more focused on keeping inflation from accelerating than on keeping the pace of economic growth from slowing.
Of the 20 industries tracked by the ISM, 14 reported growth in April, including the wood, furniture and chemical industries. The five industries that reported decreased activity were apparel, paper, electronic components, textiles and printing and publishing. Petroleum was the only industry reporting the same level of activity as the previous month.
One slightly positive reading came in the prices-paid index, which was 71.0 in April, down from 73 in March. The employment index declined to 52.3 from March's 53.3, which shows that companies are adjusting to the slowdown by keeping hiring down.
Economists were encouraged by the export-orders index, which rose to 57.2 in April from 55.4 a month earlier as the weaker dollar continues to be a driver. But overall, many thought the report was disappointing, but not unexpected. "It was consistent with the general picture that says we're going to get another quarter of economic growth that is pretty lackluster," says Joshua Shapiro, an economist at MFR Inc., a New York economic-advisory firm.
Separately, the Commerce Department said U.S. construction spending increased 0.5%, faster than expected, to a seasonally adjusted record annual rate of $1.052 trillion. Spending rose a revised 0.5% in February compared with the previously reported 0.4%.