Manufacturing in U.S. Unexpectedly Expanded in June (Update2)

By Courtney Schlisserman

July 1 (Bloomberg) -- Manufacturing in the U.S. unexpectedly expanded in June for the first time in five months, signaling exports and the government rebate checks are helping companies weather the housing slump and jump in costs.

The Institute for Supply Management's factory index rose to 50.2 from 49.6 in May, the Tempe, Arizona-based group said today. A reading of 50 is the dividing line between expansion and contraction. The group's index of raw-material costs jumped to the highest level in almost three decades.

Demand from overseas for U.S.-made products is helping to keep factories running at the same time that federal tax rebates have boosted consumer spending. The improvement signals the U.S. may be able to avoid a deep and protracted economic slowdown even as the housing slump worsens and food and fuel prices soar.

``The U.S. manufacturing sector is split between the haves and have-nots, with autos in the have-nots, building materials in the have-nots, exports in the haves,'' Roger Kubarych, chief U.S. economist at Unicredit Global Research in New York, said in an interview with Bloomberg Radio.

Economists forecast the index would decrease to 48.5 from 49.6 in May, according to the median of 78 projections in a Bloomberg News survey. Estimates ranged from 46.6 to 50.5.

A separate report from the Commerce Department showed construction spending fell 0.4 percent in May, less than forecast, as work on hotels, power plants and public hospitals helped cushion the slowdown in homebuilding. Private residential projects fell 1.6 percent in May, the 25th drop in the past 26 months, after a 1.7 percent drop in April.

Rising Exports

A shrinking trade deficit has helped some companies withstand slower U.S. sales. The ISM's export measure cooled to 58.5, from 59.5 in May, which was the highest in four years.

General Electric Co., the world's biggest maker of locomotives and power-plant turbines, said last month that sales of such equipment may rise 15 percent to 20 percent this year as Asia's emerging nations increase investment in infrastructure.

Demand ``will be significant for decades,'' Vice Chairman John Rice, who runs the GE Infrastructure unit, told reporters on June 23 outside Kuala Lumpur, the Malaysian capital. Growth in Asia will be at the top end of that forecast, he said.

GE Infrastructure, the largest of six main businesses at the Fairfield, Connecticut-based company, expects overseas sales to account for 60 percent of total revenue this year, a five percentage-point increase from 2007.

The purchasing managers' gauge of new orders for factories decreased to 49.6 from 49.7. The production measure rose to 51.5 from 51.2.

Prices Jump

The Institute's index of prices paid jumped to 91.5 last month, the highest level since July 1979, from 87 in May. Economists surveyed by Bloomberg News forecast the gauge would be unchanged.

A gauge of supplier deliveries rose to 55.1, from 53.7 in May. The inventory index improved to 51.2 from 48 and the group's measure of order backlogs climbed to 47.5 from 46.

The $78.3 billion in tax-rebate checks sent by the government through June 27 has given Americans the means to overcome the jump in fuel costs for now. Consumer spending, which accounts for more than two-thirds of the economy, rose 0.8 percent in May, the most since November, the Commerce Department said on June 27.

The rebate-induced boost to spending will be short-lived, according to economists such as RBS Greenwich Capital's Stephen Stanley. After almost all of the tax rebates are sent out by mid July, consumers will still be confronting job losses and higher food and energy costs.

Fewer Jobs

The U.S. has lost 324,000 jobs in the first five months of 2008. Economists anticipate a Labor Department report on July 3 will show payrolls dropped again last month.

The institute's employment index decreased to 43.7 from 45.5 in May.

Manufacturers also are being hurt by rising prices. Crude oil rose to a record over $143 a barrel yesterday, completing the biggest quarterly increase in nine years. Prices have climbed 47 percent this year.

While spending has held up so far, the outlook has dimmed as gasoline prices soar and confidence plummets. Sales of expensive items, like automobiles, have been hardest hit as Americans try to stretch their paychecks.

Auto Sales

Auto-industry figures, also due today, are forecast to show purchases of cars and light trucks fell to a 14 million annual rate in June, the fewest since April 1995, according to the median estimate.

General Motors Corp. announced plans on June 23 to reduce North American truck production by 170,000 vehicles after U.S. sales fell. The company is heading toward its ninth straight annual U.S. sales decline and has had three consecutive yearly losses.

Even with the challenges, manufacturing is not contracting as much as in previous recessions. While the Institute for Supply Management's manufacturing index fell to a five-year low of 48.3 in February, it was still well above the 42.1 reading reached in February 2001, a month before the start of the 2001 recession.