Reports show US growth weak if not in recession

The closely watched National Association of Purchasing Management-Chicago survey showed conditions in the Midwest region contracted for a fifth straight month, although at a less severe rate than Wall Street analysts had expected.

“We are surprised that the Chicago PMI was not weaker in June given the region's sensitivity to the ailing auto sector,” said Joseph LaVorgna, chief US economist at Deutsche Bank Securities.

The NAPM-Chicago business barometer rose to 49.6 from 49.1 in May, the strongest since January and above the median forecast of 48.0. A reading below 50 indicates contraction. The index has revived from February's 44.5.

“It looks as if manufacturing in the Midwest is holding its own,” said Gary Thayer, senior economist at Wachovia Securities in St. Louis. “Things aren't getting a lot better, but are stable at this point.”

Still, sub-components of the Chicago index looked less promising than the headline, analysts noted. Production, at 45.1, was the lowest in 90 months, and new orders dropped to 52.0, the lowest since February.

“In response to the housing slump, higher energy costs and iffy consumer spending in the second half, businesses are cutting their outlays,” said Lindsey Piegza, economic analyst at FTN Financial in New York.

Many analysts consider the Chicago survey a factory report since the region is relatively industrialized, although service companies and nonprofits are polled too.

Conditions in the more blue-collar Milwaukee region, north of Chicago, slumped in June as forward-looking indicators such as the level of new orders plummeted.

In both instances, the level of prices paid stayed very high, leaving companies with the decision of whether to pass their cost increases along to customers at a time the economy is struggling and demand, theoretically, is weak.

“Soaring commodity prices have kept producer prices high, squeezing profit margins,” said Michelle Meyer, economist at Lehman Brothers in New York.

Still, the Chicago survey suggested that at least some firms are hiking prices - the kind of second-round inflation that the Federal Reserve is concerned about.

“We were prepared for significant loss of business from a double-digit, across-the-board price increase. However, we found minimal pushback to date,” one respondent said.

Also on Monday, new figures showed a downturn in New York City business resumed in June after a brief respite. NAPM-New York's index of local business activity fell to 417.5 in June from 419.8 in May and 419.6 in April. A year ago the index was at 430.1.

US share prices got a small boost from the purchasing managers' reports and their hint that the United States can steer clear of recession. Bond yields, in turn, were slightly higher.

The national Institute for Supply Management will issue its June report on manufacturing on Tuesday. The figure often reflects trends in the various regional reports.

Wall Street forecasts the June ISM factory report at 48.6, down from 49.6 in May.

“The major regional surveys were consistent - all showed declines in manufacturing activity,” said Steven Wood, chief economist at Insight Economics in Danville, California.

Earlier in June, the Philadelphia Fed's factory survey for the US Mid-Atlantic region, and the New York Fed's Empire State survey were both weaker than expected.

“National manufacturing activity is in recession, but not enough below 50 to suggest an overall economic recession,” Wood said.

Factory orders are likely to be dogged in the months ahead by the auto industry's woes.

On Tuesday, US automakers are expected to post a double-digit sales decline for June, to a 15-year low. Record gasoline prices have squashed demand for gas-guzzling trucks and SUVs, and many would-be buyers are having trouble obtaining credit for car loans.

Crude oil prices on Monday traded above $143 per barrel for the first time.

Even with the drag from energy prices some economic indicators have steadied in May and June as fiscal stimulus checks are mailed to millions of Americans. But that temporary burst of consumer spending power should fizzle within months.

“The risk that this renewed slowdown will push the economy back into outright contraction has grown a bit further,” Jan Hatzius, chief US economist at Goldman Sachs, said in a research report. “We expect a renewed slowdown by late 2008/early 2009.” (Reuters)