Steve Quayle News Alerts

July 1, 2003
By Ian Campbell, UPI Chief Economics Correspondent

QUERETARO, Mexico, (UPI) -- Economic reports Tuesday from the U.S. Commerce Department on construction and from the Institute of Supply Management on manufacturing disappointed U.S investors and the stock market initially fell, but as usual the data left room for debate. The ISM saw its own report as "certainly encouraging for the second half of the year."

The ISM survey put its overall index for June at 49.8 percent. A figure below 50 indicates that manufacturing activity is contracting. This was the fourth month of numbers below 50, although an improvement on the 49.4 of May and the 45.4 of April.

The survey also contains a number of sub-indices. These gave a mixed picture. The New Orders Index rose by 0.3 percentage points from 51.9 percent in May to 52.2 percent in June. The Production Index rose by 1.4 percentage points from 51.5 percent in May to 52.9 percent in June.

There was also a jump in both exports and imports. The New Export Orders Index went up to 54.4 percent from May's 50.8 percent. Manufacturers may be benefiting from the fall in the dollar. Meanwhile the Imports Index rose by 4.2 percentage points to 56.4 percent in June from 52.2 percent in May.

There was no sign of deflation. On the contrary, manufacturers reported paying higher prices: the Prices Index rose by 5 percentage points to 56.5 percent. Though the markets fear deflation more than anything, rising prices for manufacturers are not a positive. Higher costs are difficult to accommodate when demand is not strong and competitive pressures are intense.

The least happy side to the report maintained a by now familiar trend: weak employment. The Employment Index came in at 46.2 percent in June. This represented, however, a considerable improvement, of 3.2 percentage points, on May when the index was 43.0.

The most difficult element to assess, however, was the Inventories Index. It dropped to a very low 41.3 percent from 46.1 percent in May. Why have inventories tumbled? Is it because demand is stronger than manufacturers expected so that production needs to be increased? Or are manufacturers holding back because they have little confidence in future demand?

Norbert Ore, the chair of ISM's manufacturing survey, interpreted the data positively. He concluded that "The mood of the survey respondents has definitely turned upbeat," and "manufacturing is positioned for a recovery in the second half."

Yet again an observer sees recovery tomorrow.

The second important report Tuesday, from the Commerce Department on construction spending, reported a fall in total spending on new construction in May when Wall Street economists had expected a small increase.

The seasonally adjusted annual rate of construction spending in May was $869.8 billion, 1.7 percent below the preceding month. This was the largest monthly decline for twelve months and the third consecutive month in which construction spending has fallen.

In housing the decline was less abrupt than in construction as a whole but still present. Spending dropped by 0.7 percent from April to an annual rate of $322.1 billion.

In January to May this year, construction activity was higher than in January to May of 2002, by 1.6 percent. This makes the year-on-year fall of 1.7 percent in the month of May more significant. This data point to a topping out of activity in a sector which has boomed in the past three years, setting it apart from the U.S. economy as a whole.

For the economy as a whole the question remains the same: Is demand about to strengthen or wane? Signs that there is no more to come from housing will give the bulls some indigestible food for thought.

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