Surveys: Factory Outlooks Good, Consumers Glum

The outlook for the U.S. factory sector was still good but consumer confidence in the economy was at a low ebb in May, according to reports released Tuesday.

The Institute for Supply Management (search) said it expects manufacturing revenue to grow 6.8 percent this year and capital spending to rise 9.8 percent.

In its last survey in December, ISM predicted that capital expenditures would rise just 1.6 percent in 2005.

"There had been a concern because businesses had seemed unwilling to expand, and now there is some part of the manufacturing sector that sees an opportunity for expansion," said Matthew Martin, senior economist at in West Chester, Pennsylvania.

However, the revenue growth estimate for manufacturing represented a somewhat more subdued outlook than the 7.8 percent revenue growth forecast the ISM issued in December.

Martin said the forecasts were encouraging because the factory sector had shown signs of slowing in March, as firms felt the pinch from higher energy prices.

Chris Low, chief economist at FTN Financial in New York, noted that capital spending grew about 11 percent in 2004, mostly to purchase new equipment. There was little investment in new structures.

"If you get some increases in spending on structures this year, I think there is a good chance that fixed investment will grow faster this year than last year," he said.

ISM also said that in the non-manufacturing sector, it expects revenue to rise 5.3 percent in 2005, with capital spending up 1.4 percent.

While the outlook for the factor sector remained solid, a survey on consumer sentiment in May showed that Americans' confidence had slipped to low levels.

According to a survey by Investor's Business Daily and TechnoMetrica Market Intelligence, economic optimism fell to a four-year low of 47.2 in May from 47.4 in April.

A reading below 50 indicates pessimism.

Terry Jones, associate editor at Investor's Business Daily, said higher interest rates, a weak stock market and a spike in oil prices had taken a toll on consumer optimism.

The survey was taken before last Friday's Labor Department report on April jobs data, which showed a sharp rise in payrolls, as well as increases in wages and hours worked.

FTN Financial's Low said that with faster income growth, consumer sentiment — and with it, consumer spending — were likely to rebound once gasoline prices stabilized.

On Monday, the Energy Information Agency (search) said that barring an unexpected surge in demand, the United States may have seen the peak of summer gasoline prices.

U.S. chain store sales rose in early May, according to Redbook Research (search), an independent company.

It said sales rose 3.2 percent in the week to May 7 versus a year earlier and 2.5 percent versus April.

A weaker-than-expected U.S. retail sales report for March was a major catalyst fueling fears that the economy was entering a soft patch. Sales rose 0.3 percent in March, less than half the median 0.7 percent gain predicted by economists. Excluding autos, sales rose just 0.1 percent.

Retail sales data for April are due Thursday. The median forecast is for a 0.7 percent rise overall and 0.6 percent without autos.