Manufacturing in U.S. shrinks at fastest pace in four years

Manufacturing in the U.S. unexpectedly contracted in May at the fastest pace in four years, indicating the industry will provide scant support for the world’s largest economy.

The Institute for Supply Management’s factory index fell to 49 from the prior month’s 50.7, the Tempe, Arizona-based group’s report showed today. Fifty is the dividing line between growth and contraction, and last month’s reading was the lowest since June 2009. The median forecast of 81 economists surveyed by Bloomberg was 51.

Factory activity has waned since reaching an almost two-year high in February as across-the-board federal budget cuts took hold and overseas markets struggled to improve. At the same time, demand for automobiles, the rebound in residential construction and lean inventories may spark a pickup in orders and production in the second half of the year.

“Manufacturing is bearing the brunt of the slowdown,” Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, said before the report. “Businesses are managing inventory levels very well. Once demand picks up, we’ll see manufacturers respond quickly.”

Estimates in the Bloomberg survey ranged from 49 to 54.

Stocks rose after the Standard & Poor’s 500 Index posted its first consecutive weekly losses since November. The S&P 500 climbed 0.2% to 1,634.71 at 10:25 a.m. in New York.

The index of production decreased to 48.6 from 53.5 in April. The new orders measure dropped to 48.8 from 52.3, and the gauge of export demand fell to 51 from 54.

The employment gauge was little changed at 50.1 from 50.2.

Order Backlogs

The measure of orders waiting to be filled declined to 48 from 53. The inventory index increased to 49 from 46.5, while a gauge of customer stockpiles improved to 46 from 44.5. A figure higher than 50 means manufacturers are building stockpiles.

The index of prices paid decreased to 49.5 from 50.

One area of the economy that remains a bright spot is residential real-estate as borrowing costs near a record low attract buyers and encourage more homebuilding projects.

Manufacturing, which accounts for about 12% of the economy, is finding support from the housing rebound as demand picks up for everything from machinery to furniture, appliances and home-decor items.

Automobile purchases may help keep assembly lines running as households use low borrowing costs to replace older vehicles. May sales, also due today, may show purchases of cars and light trucks improved from a 14.9 million annual rate in April, according to economists surveyed.

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