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PMI hits 12-month high but building investment tapers

Keywords: Tags  Purchasing Managers Index, PMI, construction spending, Institute for Supply Management, Census Bureau, new orders, backlogs, pricing production

CHICAGO — Economic activity in the U.S. manufacturing sector expanded in July, with the Institute for Supply Management’s purchasing managers index (PMI) moving up 4.5 percentage points to 55.4, its highest level in the past 12 months.

"May was exaggerated on the downside and July to the upside," said Michael Montgomery, U.S. economist for Lexington, Mass.-based IHS Global Insight Inc. "(Manufacturing) conditions are better, just not as good as the July numbers suggest."

The production index at 65 "appears to be an anomaly," he said. "The production reading would be far more credible if backlogs and inventories were not (below 50)." The order backlog index fell to 45 last month from 46.5 in June, with 10 industries, including primary metal producers and fabricators, reporting a decline in July.

Metal producers and fabricators reported growth last month, according to the Institute for Supply Management’s manufacturing business survey. Fabricators saw new orders rise, but producers did not; producers increased production, while fabricators’ output was unchanged; and fabricators said their inventories fell last month but deemed their customers’ inventories too high, while producers’ inventories were flat compared with June.

Metal producers and fabricators both said that overall they paid less for materials in July vs. June. Hot-rolled carbon steel and stainless steel pricing moved higher, while aluminum, copper and other steel products fell in price, the survey showed.

Meanwhile, U.S. construction spending was estimated at a seasonally adjusted annual rate of $883.9 billion in June, off slightly from May but 3.3 percent higher than in June last year, the U.S. Census Bureau reported.

Private construction spending declined 0.4 percent from May and public spending fell 1.1 percent, Census data show.

Spending on highways and streets fell 2.9 percent month over month and 12.4 percent year over year, while spending on manufacturing construction projects weakened 2.1 percent from May and was off 3.2 percent from a year ago.

On the commercial side, "companies are simply not expanding. (They) avoid putting up new buildings when the outlook is uncertain or bleak," IHS Global Insight economists Patrick Newport and Stephanie Karol said in an Aug. 1 note.

Public construction spending is likely to decline through year-end "because of the budgetary problems that state and local governments face, but then turn around in the first half of 2014," the economists said.

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