Manufacturing growth cools, but it won't disappear

US manufacturing index falls to lowest level since June 2009, according to the Institute for Supply Management, part of a slowdown in factory activity in key areas of the globe. While manufacturing growth is slowing, it's not going away, analysts say.

James Buck/Kalamazoo Gazette/AP/File
Mike Kastner leaves the unfinished lower half of a building acquired by his son Daniel's company 1977 Mopeds, a company that sells moped parts online. A measure of US manufacturing fell in May to its lowest level since June 2009, the Institute for Supply Management reported Monday, June 3, 2013.

The noise emanating from the world’s factories, once humming with growth, sounds more like a flat kazoo these days.

Key manufacturing nations are reporting growth so tepid that it’s almost nonexistent. Nevertheless, the evidence so far suggests growth is slowing, not disappearing.

Some of the biggest declines are centered in the United States. In May, economic activity in the manufacturing sector contracted for the first time since November, according to a survey of manufacturers from the Institute for Supply Management in Tempe, Ariz. The ISM index for May declined to 49, its lowest level since June 2009 and far below analysts’ expectations.

“We've definitely seen a pullback in activity over the past two or three months,” says Chad Moutray, chief economist for the National Association of Manufacturers in Washington. Technically, any reading below 50 signals a contraction. But he, like many economists, expect growth to slow, not disappear, in the months ahead. Mr. Moutray expects the sector’s growth to slow from 2.4 percent in the first quarter to 1.8 percent this quarter, before picking up again late in the year.

Elsewhere in the world, the outlook is mixed. On one hand, manufacturers in Japan and Europe are more optimistic than they have been in a year. Japan’s purchase manufacturers index (similar to the ISM in the US) is at its highest since August 2011. Europe’s PMI is the highest it has been since February 2012.

On the other hand, China is mixed, with one PMI pointing up and the other pointing down. Brazil’s survey of manufacturing is the least optimistic it has been since October; India’s is the weakest since the end of the Great Recession.

Overall, global manufacturing’s outlook improved, despite the fall in the US numbers, according to Barclays Research. “That said, it remains relatively weak,” write Julian Callow and Tal Shapsa of the Barclays unit in London in an e-mailed analysis.

The recession in Europe is a big reason for the global slowdown in manufacturing, and one of the biggest factors behind the decline in US manufacturing activity, says Moutray of the manufacturers association. The domestic economy hasn’t helped either, with the return of full payroll taxes for the consumer and federal budget cuts beginning to bite because of the sequester.

“If you're in the defense supply chain you're being hit pretty hard,” Moutray says. “If we want to have a robust recovery, we have to get manufacturing up and running. And the numbers we're seeing are disappointing.” 

“Becalmed still beats sinking,” writes Michael Montgomery, US economist with IHS Global Insight, in an e-mailed analysis. "It looks like a long, cool summer in the manufacturing sector."

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