The nation’s manufacturing output unexpectedly shrank to its lowest level in four years in May, according to a new report, as slowing export growth and tight fiscal policy caused factories to slow production.
The Institute for Supply Management’s manufacturing index tumbled to 49 from 50.7 in April — indicating a contraction in manufacturing for the first time since November 2012, when a massive storm hit the East Coast. The index dipped to its lowest level since June 2009, when it registered 45.8 percent. (A reading below 50 indicates a shrinking manufacturing sector).
The slowdown surprised many analysts, who nonetheless remained optimistic that manufacturing output would increase in the second half of the year.
“We definitely have seen some softness in the economic data for manufacturing over the last few months, particularly looking at exports and some of the sentiment surveys,” said Chad Moutray, chief economist for the National Association of Manufacturers. “It is very clear that there continues to be very soft sales and production activity nationally.”
The across-the-board federal budget cuts that went into effect this year slowed production for some defense firms, Moutray said, while continued weakness in the European economy as well as some slowness in China have put a damper on exports.
He noted that the Federal Reserve’s measure of manufacturing output was up only 1.3 percent in the year ending in April, a weak showing.
Nonetheless, many analysts, citing robust auto sales and continuing improvement in the housing market, called May’s contraction an aberration that will soon be corrected. On Monday, automakers reported strong gains in car sales in May, continuing a string of monthly reports from Detroit that have exceeded analysts’ expectations. Total U.S. auto sales are on track to reach more than 15 million vehicles on an annualized basis, well ahead of last year.
Those reports come on top of a recent report showing that housing prices increased at the fastest clip in seven years. Both the auto and housing sectors should help drive increases in manufacturing output, analysts said.
“There is no indication that the manufacturing decline in May was anything more than a blip on the screen,” said Bradley J. Holcomb, chairman of ISM’s Manufacturing Business Survey Committee. “I still anticipate a good second half of the year. We are certainly going to have some ups and downs along the way.” Holcomb noted that just over a month ago, a separate ISM report forecast a 4.8 percent growth in manufacturing revenue for 2013 — a prediction that he continues to stand by. “A lot of that is in front of us,” Holcomb said.