Business Activity Unexpectedly Shrinks as Output Drops

Tuesday, 30 Apr 2013 10:20 AM

 

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Business activity in the U.S. unexpectedly shrank in April for the first time in more than three years, a sign manufacturing may be a smaller contributor to economic growth this quarter.

The MNI Chicago Report’s business barometer fell to 49 in April, the lowest since September 2009, from 52.4 last month. A reading less than 50 signals contraction. The median forecast of 51 economists surveyed by Bloomberg was 52.5.

Manufacturing, which makes up about 12 percent of the economy, is starting to cool in the wake of across-the-board cutbacks in federal government spending that went into effect in March. At the same time, consumer purchases led by demand for automobiles may prevent a sharper pullback at factories and help keep assembly lines running.

“We’re starting to see some slowdown in manufacturing as budget cuts take effect,” Jennifer Lee, a senior economist at BMO Capital Markets in Toronto, said before the report. “It’s like what is happening in most parts of the U.S. economy. Manufacturing will keep expanding, just not at the same pace.”

Projections in the Bloomberg survey ranged from 51 to 54.2.

The employment measure dropped to 48.7, the weakest this year, from 55.1 in the prior month, the report showed.

The production gauge decreased to 49.9 from 51.8.

One bright spot was that orders held up, signaling the slump last month may be short-lived. The index of new bookings climbed to 53.2 from 53.

Even with little change in demand, the measure of backlogs declined to 40.6, a more than three-year low, from 45. The gauge of inventories also fell to 40.6, the weakest since December 2009.

The index of prices paid slumped to 51 this month, the lowest since October 2009, from 61 in March.

Companies projecting a better outlook include Dallas-based Texas Instruments Inc. The largest maker of analog chips on April 23 forecast second-quarter sales and profit that may top some analysts’ estimates, helped by increased orders from manufacturers of automotive and industrial-machine parts.

“We saw strength in the industrial and automotive sectors,” Chief Executive Officer Kevin March said in an interview. “Customers continue to operate with very lean levels of inventory.”

The lagged effect from a two percentage-point jump in the payroll tax at the start of 2013, and $85 billion in automatic budget cuts that began last month, will cool the economy this quarter, economists project.

At the same time, factories are poised to keep getting help from demand for autos. Cars and light trucks sold at an average 15.3 million annualized rate in the first quarter, the most since the same period in 2008, according to figures from Ward’s Automotive Group.

Less government spending, and the higher payroll tax, are the “only negative real headwinds,” Kurt McNeil, vice president of U.S. sales and service at Detroit-based General Motors Co., said on an April 2 conference call. The positive factors include jobs, housing and the stock market’s performance, he said.

Economists watch the Chicago index and other regional manufacturing reports for an early reading on the national outlook. The Chicago group says its membership includes both manufacturers and service providers, making the gauge a measure of overall growth. Its members have operations across the U.S. and abroad.

The Federal Reserve Bank of New York’s so-called Empire State measure showed manufacturing in the region expanded in April at the lowest pace in three months, and the Federal Reserve Bank of Philadelphia’s index also showed factory activity barely grew in the region.

The ISM’s monthly national factory index probably also cooled this month, according to the median forecast of economists surveyed. The Tempe, Arizona-based group’s figures are due Wednesday.

© Copyright 2014 Bloomberg News. All rights reserved.

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