[09/01/15] A key report Tuesday dampened hopes that U.S. manufacturing will serve as a growth engine in the second half of the year as a strong dollar and low oil prices continue to hamper production.
Instead, manufacturers are bracing for more troubles in the fourth quarter amid China’s economic weakness and global market turmoil.
“When there’s doubt among consumers and investors, it means (businesses) are not going out and doing projects,” says Gregory Jenkins, owner of Flinchbaugh, a 30-employee steel parts maker in Manchester, Pa.
The Institute for Supply Management said its index of manufacturing activity fell to a two-year low in August, slipping to 51.1% from 52.7% the previous month. A reading above 50 indicates the sector is expanding; below 50 means it’s contracting.
Manufacturing was expected to pick up in the second half of 2015 on a stabilizing dollar and oil prices. Earlier in the year, a rising greenback hampered U.S. exports and low oil prices curtailed energy investments. But both the dollar and crude oil have been volatile, in part because of slowing demand in China, the world’s second-largest economy.
Last month, the Chinese government devalued its currency to prop up its exports, further strengthening a dollar that already had been pushed up by economic troubles in the euro zone and expectations that the US Federal Reserve will raise interest rates as soon as this month.
On the positive side, a solid U.S. housing recovery and stronger retail sales, particularly autos, have helped U.S. factories maintain modest growth.
Perhaps most worrisome in Tuesday’s report Is that a measure of new orders dropped substantially, possibly auguring continued sluggish production.
“We haven’t seen the rebound in the manufacturing sector that we’ve seen in other pockets of the economy,” such as retail sales and housing, says Chad Moutray, chief economist of the National Association of Manufacturers.
The industry’s research arm, MAPI Foundation, has revised down its forecast for industrial output growth this year to a tepid 2.1% from 2.4%, says Don Normanan economist for the group.
Jenkins says Flinchbaugh’s sales of its metal parts to Pennsylvania’s natural gas drilling industry, and to heating and air-conditioning makers, have slowed this year. but they’ve been more than offset by pent-up demand from U.S. truck makers. Overall, he says, sales are up about 10% in 2015, but he’s worried about a dearth of orders for the fourth quarter – at least partly a response to the recent stock market downturn and worries about China. He has shelved tentative plans to buy a new $250,000 factory machine.
Paulson Manufacturing, which makes facemasks for industrial and public safety use, has been hurt by the oil industry downturn but solid demand from US factories sparked a partial rebound in the third quarter, says CEO Roy Paulson. Yet exports to regions such as China and the eurozone — which comprise a quarter of the company’s revenue — are down 20% this year as a strong dollar makes its products more expensive for foreign buyers.
In response, Paulson says he has lowered prices for overseas customers and offered to fix prices for a two-year period. That has helped the Temecula, Calif., company retain a portion of its foreign business but raises the risk that it could absorb short-term losses.
Paulson says he has cut capital spending by 75% this year and hired temporary workers rather than full timers.
“I need to retain my ability to reduce overhead,” he says.
Publisher: USA Today
Author: Paul Davidson
Link: http://www.usatoday.com/story/money/2015/09/01/ism-manufacturing-august/71493252/
