Manufacturing in the U.S. expanded in April at the slowest pace in four months, indicating the industry will contribute less to U.S. growth this quarter.
The Institute for Supply Management’s factory index fell to 50.7 from the prior month’s 51.3, the Tempe, Arizona-based group’s report showed today. A reading of 50 is the dividing line between expansion and contraction. The median forecast of 84 economists surveyed by Bloomberg was 50.5.
Manufacturing, which makes up about 12% of the economy, is cooling as the need to rebuild inventories wanes and across-the-board federal budget cuts take hold. Companies such as Tenneco Inc. project it may take until the second half of the year for demand to pick up as American consumers grapple with higher payroll taxes and Europe’s economy struggles to expand.
“We’re in a bit of a lull right now,” Bricklin Dwyer, an economist at BNP Paribas in New York, said before the report. “It’s consistent with the pullback in the broader economy, in consumer spending, business spending and government. We see this as temporary.”
The median forecast was based on projections from 84 economists in the Bloomberg survey. Estimates ranged from 49 to 53.
Other figures today show manufacturing across the globe is struggling to improve. In China, the world’s second-largest economy, factories expanded at a weaker pace in April. The Purchasing Managers’ Index fell to 50.6 last month from 50.9 in March.
A U.K. factory index showed manufacturing contracted for a third month. The gauge rose to 49.8 last month from 48.6, according to Markit Economics and the Chartered Institute of Purchasing and Supply.
Another report showed companies in the U.S. added fewer workers than forecast in April, an indication the labor market has cooled along with the rest of the U.S. economy.
The 119,000 increase in employment, the weakest since September, followed a revised 131,000 gain in March that was smaller than initially estimated, according to figures from the Roseland, New Jersey-based ADP Research Institute. The median forecast of 37 economists surveyed by Bloomberg projected a 150,000 advance.
The ISM’s index of U.S. employment gauge decreased to 50.2, the lowest in five months, from 54.2.
The production increased to 53.5 from 52.2 in March. The new orders measure rose to 52.3 from 51.4, and the gauge of export demand dropped to 54 from 56.
The measure of orders waiting to be filled climbed to 53 from 51. The inventory index decreased to 46.5 from 49.5, while a gauge of customer stockpiles dropped to 44.5 from 47.5. A figure higher than 50 means manufacturers are building stockpiles.
The index of prices paid for materials decreased to 50 from 54.5.
The economy’s inability to maintain a faster pace of growth and bigger employment gains explain why Federal Reserve policy makers, who conclude their two-day meeting today, will probably reiterate the need to continue record monetary stimulus. The officials have said they’ll maintain that policy until the outlook for the labor market improves “substantially.”
At the same time, consumer spending led by demand for automobiles may help keep manufacturing from faltering. Cars and light trucks sold at an average 15.3 million annualized rate in the first quarter, the most since the same period in 2008, according to figures from Ward’s Automotive Group.
Tenneco, a maker of diesel-exhaust filters and mufflers, is seeing a “mixed global industry environment,” according to Chief Executive Officer Gregg Sherrill. The Lake Forest, Illinois-based company expects to benefit later this year from improving light-vehicle production in North America and overseas markets including China.
“With a continued weak global market and the significant inventory destocking taking place, we anticipate production to remain at low levels in the second quarter,” Sherrill said in an earnings conference call on April 29. “However, as inventory issues are worked through, we expect to see some volume improvements in the second half of the year.”
Regional reports signaled factories pulled back in April. The MNI Chicago Report’s business barometer fell to 49, the weakest since September 2009, from 52.4 in March, according to figures yesterday. A reading less than 50 signals contraction.
The Federal Reserve Bank of New York’s so-called Empire State measure showed manufacturing in the region expanded in April at the slowest pace in three months, and the Federal Reserve Bank of Philadelphia’s index showed factory activity barely grew.
The 2.5% annualized pace of economic expansion in the first three months of the year may give way to weaker growth this quarter amid the lagged effect from a two percentage-point increase in the payroll tax at the start of 2013 and $85 billion in automatic budget cuts that began on March 1.
Growth will slow to a 1.5% pace from April through June, then reaccelerate to an average 2.4% rate in the last six months of the year, according to an April survey by Bloomberg.