Wed, Jun 05, 2002 page21

• Manufacturing levels rise

  • REUTERS
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  Manufacturing activity in the US and Europe showed solid expansion in May, reports showed on Monday, indicating that a global recovery in industry is deepening and reinforcing growth around the world.

  But both the US and European indexes showed the global demand behind the expansion also pushed up costs of raw materials. In Europe, the report raised concerns about inflation and potentially higher interest rates in the months ahead.

  The US-based Institute for Supply Management said its monthly manufacturing index rose more than expected in May to 55.7 -- its highest level since hitting 56.7 in February 2000 -- from 53.9 in the prior month. Economists polled by Reuters had forecast the index to rise to 55. Any reading above 50 suggests growth, while one below 50 indicates contraction.

  And the Reuters Eurozone Purchasing Managers' Index rose to 51.5 in May, the highest since February 2001. The May reading reflected a second straight month of increasing output.

  "We are seeing some signs of a broadening of global growth momentum," said Bruce Kasman, senior economist and head of global economic research at JP Morgan Chase.

  Kasman said the global rebound in manufacturing was one reason for the US dollar's recent weakness against other currencies as investors seek to gain on improved returns in other regions and countries of the world, from Asia to Canada.

  "The basic message here is a good one for global growth," he said.

  Most analysts said that despite the rise in prices in both reports, the reports indicated a still nascent rebound from a year-long downturn that would likely keep the US Federal Reserve and the European Central Bank from lifting interest rates in coming months as they try to secure a solid recovery.

  But some economists said the pickup in inflation could prompt the ECB to begin hiking benchmark rates as soon as July, even if the euro's recent strength would deflect some of the pressure from rising prices.

  After an 18-month slump driven by a record runoff of inventories, US factories this year have boosted production to meet rising new orders.

  So far the improvement has yet to translate into new hiring or stronger capital investment, which Federal Reserve officials have said they want to see to ensure a sustainable recovery is under way. Until that happens, most analysts expect the central bank to keep short-term US interest rates steady at 40-year lows.

  A separate report showed US construction spending rose more than expected in April, bolstered by record spending on home building.

  But US auto sales in May fell 5.7 percent from the same month a year ago, raising worries that US consumers are beginning to lose their ardor for buying big-ticket items.

  Still, the outlook for US manufacturing continues to brighten, as a pickup in orders for goods helped drive the ISM index higher. That could signal future strength in the sector later in the year. Factories, however, continued to shed workers, but they did so at a slower pace. Industries such as furniture production and publishing reported hiring workers.

  "The second quarter is going to be strong and we can start thinking about this spilling over into the third [quarter]," said Norbert Ore, chairman of the ISM business survey committee.

  The closely watched New Orders Index, a measure of pipeline demand for goods, rose in May to 63.1 from 59 in April. But factories shed more jobs even as the Employment Index rose slightly to 47.3 from 46.7 in April.

  Since mid-2000 the US factory sector has shed more than 1.7 million jobs.
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