Manufacturing expands at slower-than-expected pace

Associated Press • Apr 2, 2007 at 10:51 AM

NEW YORK - In yet another sign that U.S. economic growth may be slowing, manufacturing companies reported Monday that business expanded at a lower- than-expected pace in March even as prices surged for raw materials.

The Institute for Supply Management, a trade group of corporate purchasing executives, said its manufacturing index registered 50.9 in March, below the February reading of 52.3 and Wall Street's expectation of 51.

A reading above 50 indicates growth for the sector, while a reading below 50 indicates contraction.

Despite the sluggish growth, prices appeared to be surging for certain commodities, including aluminum, cobalt, copper, corn, corrugated containers, diesel fuel, natural gas and steel, as demand increased around the world.

The ISM's price index shot up to 65.5 in March from 59 in February, causing unease among analysts and investors.

"There's very little growth, but prices are rising. It's not a healthy mix," said Nigel Gault, an analyst with Global Insight in Lexington, Mass. Rebounds in oil prices over the past few months are also adding to pricing pressures, he said.

Employment and manufacturers' inventory levels also declined.

The ISM's manufacturing sector index, compiled from a survey of the group's members, has wavered above and below 50 for several months, an indication of the overall economy's uncertain path. It showed contraction in November, rebounded in December, fell back again in January, only to expand again in February.

The expansion in March marked the second consecutive month of growth for the manufacturing sector, while the overall economy grew for the 65th consecutive month. While indicating a less optimistic outlook than expected, the report shouldn't have a big impact on the markets, Gault said. Stocks were mixed after the report as investors showed their ongoing nervousness about the overall economy's health, including inflation levels; the fear on Wall Street is that the Federal Reserve will be less inclined to lower interest rates if price increases are accelerating. The Dow Jones industrials rose 14.14, or 0.11 percent, to 12,368.49 in afternoon trading. The ISM report revealed some positive trends: Companies had more orders for new business and their production expanded in March. After five consecutive months of growth, the customers' inventories index fell to 48, indicating manufacturers' inventories are nearing satisfactory levels, said Norbert Ore, chair of the survey committee for Tempe, Ariz.-based ISM. That raised hopes for an increase in orders in the months ahead. Among the top performing industries reporting growth in March were apparel; leather and allied products; miscellaneous manufacturing; wood products; transportation equipment; plastics and rubber products and food, beverage and tobacco products. While the economy's sluggish growth is causing delays on expansion and investment, it isn't yet causing order cancellations, said Dennis Sadlowski, chief operating officer of Siemens Energy & Automation. "The executives we speak with are still fairly optimistic about the outlook for the rest of the year," he said. A number of industries, including food and beverage and aerospace, are performing well, even as the automotive and housing sectors are continuing to slow, he said. Electronics is also starting to show some softening, Sadlowski said. The report shows a continuation of the sluggish pace of manufacturing growth that started in the last quarter of 2006, said Thomas J. Duesterberg, president and chief executive officer of the Manufacturers Alliance-MAPI in Arlington, Va. The recession in housing and autos, along with the sub-par performance of capital investment, were to blame for the slowdown, he said. --- On the Net: www.ism.ws AP-CS-04-02-07 1545EDT

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