May manufacturing activity cooled to 20-month low

U.S. manufacturing activity expanded in May at the slowest pace in 20 months, the latest sign that a sharp rise in energy prices is hampering economic growth.

The Institute for Supply Management, a trade group of purchasing executives, said Wednesday that its index of manufacturing activity fell to 53.5 percent in May from 60.4 in April.

Any reading above 50 indicates growth in manufacturing. May marked the 22nd straight month of expansion in what's been one of the few sources of strength for the economy since the recession ended nearly two years ago.

Still, last month's figure was the weakest since September 2009. And the decline from April's pace was the sharpest one-month drop since 1984.

Separately, the Commerce Department said builders began work on more home-remodeling projects to boost construction spending for the second straight month. But the 0.4 percent increase in April barely lifted spending above its lowest level in more than a decade.

The seasonally adjusted annual rate of $765 billion is just 0.5 percent higher than an 11-year low hit in February. Analysts predicted it could be another four years before overall construction spending returns to a more healthy level of around $1.5 trillion annually.

The weak data offered the latest evidence that the economy is hitting a second "soft patch" nearly two years after the recession officially ended. Stocks plunged after the reports were released. The Dow Jones industrial average fell more than 266 points in afternoon trading.

The manufacturing index had topped 60 for the first four months of the year. Manufacturers had increased production to meet overseas demand for computers and other long-lasting equipment.

Although manufacturers in most industries reported growth in May, all said they felt squeezed by the rising costs of fuel, chemicals, metals and other inputs. High prices for oil and other commodities have also dampened consumer spending, which has led to less demand for factory goods.

Cliff Waldman, economist with the Manufacturers Alliance/MAPI, a trade group, called the sharp decline "worrisome."

"Elevated commodity prices, slowing global growth, and an increasingly questionable outlook for the U.S. economy are creating headwinds for the factory sector, which thus far has been the one strong element in an otherwise sluggish U.S. economic rebound," Waldman said.

Manufacturing has been one of the strongest sectors of the economy. It has grown in all but one month since the recession ended, according to the trade group index. Still, manufacturing represents only about 11 percent of U.S. economic activity.

Spending by consumers, by comparison, accounts for 70 percent of economic activity. For consumers to spend more, the job market must continue to improve. The ISM's employment index fell to 58.2 from 62.7, indicating that manufacturers are still adding jobs, though at a slower pace.

The government's full report on jobs in May will be released Friday. The consensus forecast is that the economy added 190,000 jobs last month. But the weak data — including a report from payroll processor ADP that said private employers added only 38,000 jobs in May — prompted some economists to lower their expectations.

U.S. manufacturers are not alone in seeing less demand. Earlier Wednesday, separate reports in China showed that that country's manufacturers saw sluggish growth in orders in May. Widespread power shortages and inflation-fighting measures dampened demand.

The China Federation of Logistics and Purchasing said its purchasing managers index fell to 52 from 52.9 in April. The index has shown expansion for 26 straight months. And a survey by London-based bank HSBC hit a 10-month low, as manufacturers added workers despite relatively slower output and new orders in May.

The ISM survey showed a sharp decrease in demand for manufactured goods both in the U.S. and abroad. Indexes for new orders, production and order backlogs showed the steepest declines. New orders and order backlogs were at 51.0 and 50.5, respectively, suggesting that they are barely growing.

Three industries contracted: printing; furniture; and food, beverage and tobacco. All three are closely linked to spending by consumers.

And an index of manufacturers' inventories swung from growth to contraction. That suggests manufacturers are replenishing their stockpiles at slower paces after selling off excess goods that they produced during periods of stronger demand.

The ISM survey also found that the overall economy grew for the 24th straight month.

The ISM, a trade group of purchasing executives based in Tempe, Ariz., compiles its manufacturing index by surveying about 300 purchasing executives across the country.