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NAPM index creeps up
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May 1, 2001: 12:52 p.m. ET
U.S. manufacturing still shrinking, but worst declines may be over
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NEW YORK (CNNfn) - Manufacturing in the United States continued to shrink in April, the nation's purchasing managers said Tuesday, but at a slightly slower pace, indicating the U.S. economy is still ill, but may be feeling a little better.
The National Association of Purchasing Management's key index of manufacturing activity rose to 43.2 in April from a reading of 43.1 in the previous month, the NAPM said. Economists polled by Briefing.com expected the April reading to come in at 44.0.
Norbert Ore, head of the NAPM's survey committee, said there was "no bad news" in the April report.
"In terms of the rate of decline, we've probably seen the worst. The economy is decelerating more slowly now," Ore told reporters in a conference call.
The NAPM index is based on a survey of purchasing executives who buy the raw materials for manufacturing at more than 350 industrial companies. A reading below 50 indicates a shrinking manufacturing sector; a reading below 42.7 percent points to a contraction in the overall economy.
The NAPM was concerned about its employment index, which fell below 50 percent for the seventh straight month, indicating employment in the sector is shrinking at a faster rate. But employment should pick up as the economic slowdown decelerates, Ore said.
The NAPM found other bright spots in its data, including inventory reductions and lower prices for materials. The rate of new orders also shrank at a slower rate than in March.
Ore warned that volatile energy costs could hamper a recovery in the second half, especially if a rise in gasoline prices dampens consumer spending and energy shortages raise prices manufacturers pay.
"The wild card is what happens to energy prices," Ore said.
Fed could be less aggressive
Manufacturing activity accounts for roughly one-fifth of the U.S. economy, and the NAPM index traditionally has been a closely monitored gauge for the nation's overall economic health. It's also the first broad indicator of the U.S. economy's performance in April.
The economy has been in an extended slowdown, and the Federal Reserve has cut interest rates four times this year in an effort to reinvigorate it and avoid a recession.
Economists and bond traders generally think the strengthening manufacturing data could temper the Fed's aggressiveness when it considers cutting rates again at its May 15 meeting.
"The more stable picture in the total index and the lessening pace of decline in orders would fit with the idea of a 25-basis-point (0.25 percent) reduction on May 15 instead of the more aggressive 50-basis-point (0.5 percent) (cuts) of recent months," said David Orr, chief economist with First Union.
Recovery not around the corner
U.S. manufacturing has been hardest hit by the economic slowdown, and economists said April's NAPM data offer signs of hope for the future of manufacturing, but a recovery is not around the corner.
"We see some early signs of improvement in manufacturing, but the contraction continues," said economist Paul Christopher with A.G. Edwards & Sons. "Today's report should simply remind investors the economy is not out of danger yet."
Ian Shepherdson, chief U.S. economist with High Frequency Economics Ltd., though encouraged by the pace of new orders and inventory reduction, also said he thought the NAPM index could move downward again in the next few months.
"Production was steady," Shepherdson said, but "a real industrial recovery is still some way off."
Manufacturers pessimistic
Separately, the Commerce Department said construction spending jumped 1.3 percent in March to an annualized rate of $854.4 billion. Economists polled by Briefing.com expected spending to rise by only 0.2 percent.
U.S. stocks and bonds showed little reaction to the economic news. The Nasdaq fell less than 1 percent, the Dow rose less than 1 percent, and bonds posted modest gains.
In a separate report, the NAPM said U.S. manufacturing executives are more pessimistic about the 12-month outlook for their sector than in nearly four decades.
In its semi-annual report issued at its annual conference, NAPM said 38 percent of purchasing managers were pessimistic over the 12-month outlook, up sharply from 5 percent in the previous survey taken last December. The highest number since the survey began in 1962 is 38 percent, the NAPM said.
Still, a majority of manufacturers predict the second half of 2001 will be better than the first half, the report said. 
-- from staff and wire reports
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