- The Washington Times - Wednesday, June 1, 2005

From combined dispatches

NEW YORK — U.S. manufacturing expanded at an unexpectedly slow rate in May, constrained by high energy prices and fat inventories, especially in the automobile sector, a private research organization reported yesterday.

While manufacturing activity expanded in May for the 24th consecutive month, the rate has slowed in each of the last six months, and May’s reading was the lowest since June 2003, according to the Institute for Supply Management.

The falloff in auto production came after months of drooping sales at auto dealers, with both Ford Motor Co. and General Motors Corp. reporting sales drops of more than 11 percent last month.

“Automakers are a concern,” said Gary Thayer, chief economist at A.G. Edwards & Sons. Inc. “Gas prices mean consumers are balking at buying gas guzzling SUVs.”

Sales of Ford cars and trucks fell 11 percent to 283,994. All of Ford’s brands except Land Rover had a decline in U.S. sales. Truck sales fell 13 percent as the Explorer SUV dropped 35 percent and Escape sport utility vehicles had a 40 percent decline.

Ford, the second-biggest U.S. automaker, said it would trim North American production by 2.3 percent in the third quarter and raise rebates to as much as $5,000 on some hard-to-sell sport utility vehicles.

GM said its U.S. sales of cars and trucks fell 12 percent to 393,197 from the same month last year. Sales of GM cars fell 9 percent, and light trucks declined 15 percent.

DaimlerChrysler AG reported May U.S. sales of 232,386, a 2.5 percent decline from a year earlier.

In contrast, the robust housing market continued to push up construction spending and contribute to economic growth.

A report from the Commerce Department yesterday said construction spending rose 0.5 percent to a record rate of $1.066 trillion in April, as office construction surged and activity in home building hit an all-time high.

Construction rose 0.6 percent in March and 1.2 percent in February.

It was the weak manufacturing report, however, that sparked a rally in the stock market yesterday, as investors speculated that the woes in the industrial sector would make the Federal Reserve think twice before further tightening interest rates.

“The data shows that the economy has cooled off,” said Mr. Thayer.

The Dow Jones Industrial Average rose 81.58 to 10,549.06, rising as much as 123.51 before giving up some of its gains as oil prices surged more than $2.60 per barrel. Broader stock indicators also moved sharply higher. The Standard & Poor’s 500 Index was up 10.72 at 1,202.22. The Nasdaq Composite Index climbed 19.64 to 2,087.86.

Last year, when the economy was stronger, industrial companies pumped up their inventory levels. However, now those companies have enough inventory and are in the process of selling off what they have. That is especially true in the auto sector, Mr. Thayer noted.

Richard D. Rippe, chief economist at Prudential Equity Group, said that “energy prices are the biggest short-term risk” for the economy, but the recent moderation in pump prices gives hopes that manufacturers will regain some of their lost momentum.

The high energy prices will boost inflation, he said, driving up costs for producers as well as consumers. An index of prices paid by producers showed price growth dropped dramatically last month, however, signaling that inflation remains in check.

The institute said its index for new orders grew more slowly in May, while its employment index contracted.

The pullback in manufacturing jobs contrasts with improving employment in the overall economy, Mr. Rippe noted, and mostly reflects companies working through inventory, a normal occurrence in the business cycle.

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