Factories in U.S. grow more than forecast on stronger orders

WASHINGTON – Manufacturing expanded more than forecast in May as orders grew at the fastest pace in five months, indicating the industry is starting to emerge from a first-quarter slump.

The Institute for Supply Management’s factory index rose to a three-month high of 52.8 from 51.5 in April, figures from the Tempe, Ariz.-based group showed Monday. The median projection of economists in a Bloomberg survey called for a reading of 52.

The pickup in bookings and the strongest reading for order backlogs since November point to production gains that will probably help the economy bounce back after shrinking last quarter. While two months of improved business investment and the end of a labor dispute at West Coast ports are allowing manufacturing to stabilize, progress may be halting as a strong dollar hampers export sales.

“The manufacturing sector is getting a little bit of momentum after being restrained in Q1,” said David Sloan, a senior economist at 4Cast Inc. in New York. “There are not quite as many headwinds as there were, but it’s still not particularly impressive.”

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Fourteen of 18 U.S. manufacturing industries expanded in May, led by producers of apparel, furniture and paper. Makers of textiles and computer and electronic products were the two industries that said business contracted.

Estimates in the Bloomberg survey of 84 economists ranged from 50 to 53. Readings greater than 50 indicate growth.

‘Right direction’

“It’s nothing to write home about yet, but we’re moving in the right direction,” Bradley Holcomb, chairman of the ISM Manufacturing Business Survey Committee, said on a conference call. “We’re still slugging away here, and yet, I think there are some robins on the lawn in spring, if you will, that suggest that we’re moving in the right direction and could continue to do so.”

In Europe, manufacturing in Spain and Italy expanded more than forecast in May as the weaker euro helped drive exports. Markit Economics said its gauge for Italy climbed to 54.8, the highest level since 2011, while the Spanish measure jumped to 55.8. Markit’s factory PMI for the entire 19-nation euro region matched the strongest reading since May 2014.

Another report Monday showed personal spending unexpectedly stalled in April as Americans used income gains to shore up savings, raising the risk that the biggest part of the economy may take time to gain momentum.

The unchanged reading in purchases followed a 0.5 percent gain the prior month that was larger than previously estimated, Commerce Department figures showed in Washington. The median forecast in a Bloomberg survey of 79 economists called for a 0.2 percent rise. Earnings increased 0.4 percent, more than projected, and the saving rate climbed.

Orders, backlogs

The ISM’s measure of new orders climbed to 55.8 in May from 53.5, while the gauge of order backlogs increased to 53.5 last month from 49.5.

More factories also said they were expanding headcounts, with the ISM’s gauge of employment climbing to 51.7 in May from 48.3.

The measure of production eased to 54.5 from 56, while the export index cooled to 50 from 51.5.

A swelling trade gap in the first quarter subtracted the most from gross domestic product in 30 years as the appreciating dollar caused exports to slump. The deficit cut 1.9 percentage points from growth, the most since 1985.

First quarter

GDP, the volume of all goods and services produced in the U.S., shrank at a 0.7 percent annualized rate, revised from a previously reported 0.2 percent gain, according to Commerce Department figures issued Friday in Washington.

The economy is poised to pick up this quarter. A Bloomberg survey of 72 economists from May 8 to May 13 projected GDP will climb at a 2.7 percent pace in the April through June period, with household consumption expanding 3.2 percent.

Continued improvement in the labor market that includes bigger pay gains would help encourage more Americans to spend and propel growth.

“The U.S. economy seems well-positioned for continued growth,” Federal Reserve Chair Janet Yellen said in a May 22 speech in Providence. If the economy continues to improve as she expects, “it will be appropriate at some point this year” to start raising rates, she said.

Recent figures showing pickup in the housing market helps explain why Deere & Co., the largest maker of farm equipment, forecast on May 22 better-than-expected profit for fiscal 2015, The Moline, Illinois-based company said improvements in U.S. building activity spurred demand for its construction equipment.

While poor winter weather and shipping delays due to the port dispute earlier this year were temporary, the damage caused by the plunge in fuel prices and stronger dollar may be longer-lasting for manufacturers.

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