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News > Economy
U.S. industry stronger
July 2, 2001: 11:16 a.m. ET

Americans earned and spent more in May, good news for U.S. economy
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NEW YORK (CNNfn) - Manufacturing in the United States shrank again in June, the nation's purchasing managers said Monday, but came in a bit stronger than analysts had expected, indicating the worst may be over for the world's largest economy.

The National Association of Purchasing Management (NAPM) said its key index of manufacturing activity, the Purchasing Managers Index, rose to 44.7 in June from 42.1 in May. Economists polled by Briefing.com expected a reading of 42.5.

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A reading below 50 indicates a shrinking manufacturing sector, while a reading below 42.7 percent points to contraction in the overall economy, according to the group, whose members buy raw materials for about 300 of the nation's biggest companies.

"While the [manufacturing] sector continues to struggle, the rate of decline slowed somewhat during the month," said Norbert Ore, director of the NAPM survey committee.

Separately, the U.S. government said Americans earned and spent more in May, indicating consumer spending continued to hold up relatively well despite the economic slowdown.

The Commerce Department said consumer spending – which fuels about two-thirds of the nation's economy – rose $32.1 billion, or 0.5 percent, in May after a revised 0.5 percent gain in April. Analysts surveyed by Briefing.com had forecast a 0.3 percent rise for May.

Meanwhile, U.S. income edged up $18.2 billion, or 0.2 percent, in May after rising 0.2 percent in April. Analysts polled by Briefing.com expected a 0.4 percent gain.

Personal savings as a percentage of disposable income hit a rate of  negative 1.3 percent, matching a record monthly low set in January. The rate in April was revised to negative 1.0 percent.

"These data again show that when people have substantial net assets, slower income growth need not kill spending," said Ian Shepherdson, chief U.S. economist with High Frequency Economics Ltd.

U.S. stocks traded slightly higher after the reports, and U.S. Treasury bond prices also rose.

Manufacturing set to recover?

Tough economic times have hit the manufacturing sector the hardest; corporate spending has slowed, leading to less demand for goods, which have been stacking up on manufacturers' shelves, resulting in a slowdown in production and hundreds of thousands of job cuts.

Though the sector has been shrinking for 11 straight months, the NAPM said, it has been slowly improving this year. Meanwhile, the rate of new orders for goods improved in June, and companies continued to get rid of their backlog of inventories, meaning production could increase in the future.

"I was especially impressed with the new orders index," said Michael Moran, chief economist at Daiwa Securities. "It rose more than three percentage points and is not far from 50 percent. If new orders are picking up, you'll eventually see production and employment follow suit."

The NAPM also said manufacturers paid lower prices in June, indicating inflation pressure is in check despite aggressive actions by the U.S. Federal Reserve to keep money flowing through the economy and avoid a recession.

Rate cuts may be working

The Fed, in an effort to keep consumers spending, has cut short-term interest rates six times this year, slashing its target for the federal funds rate from 6.5 percent to 3.75 percent.

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So far, the Fed's efforts seem to have worked: In a report Friday on first-quarter gross domestic product, the Commerce Department said consumer spending grew at a healthy 3.4 percent in the quarter, lifting the otherwise anemic 1.2 percent overall GDP growth.

And the University of Michigan's final June consumer sentiment index, which measures consumers' attitudes about the economy, rose to 92.6 in June from 92.0 in May, according to a Reuters report.

In May, spending on durables – costly manufactured goods expected to last at least three years, such as cars and washing machines – rose by 1.2 percent, following a tiny 0.1 percent increase. That was the strongest showing since February.

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Spending on nondurable goods such as clothes and food went up 0.5 percent in May, down from a 1 percent increase in April.

Spending on services grew by 0.3 percent for the second month in a row. The services category includes such things as gas and electric utilities, visits to doctors, bus and train fares and rent for housing.

None of the spending figures is adjusted for inflation.

The May report's gauge of inflationary pressures was relatively tame. The chained index for personal consumption expenditures, a favorite of Federal Reserve Chairman Alan Greenspan, rose by only 0.1 percent in May. Excluding food and energy prices, it actually slipped 0.1 percent. graphic


-- from staff and wire reports

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