Europe's woes begin to stunt U.S. manufacturing growth

  • Article by: SUSAN FEYDER , Star Tribune
  • Updated: June 1, 2012 - 8:26 PM

Exports slowed in May, and raw material prices dropped sharply.

Europe's economic problems appear to be casting a shadow on U.S. factories, threatening hopes of a sustained resurgence in manufacturing.

Two closely watched barometers of manufacturing activity Friday reported lower growth in May, dragged down by declines in exports that showed the impact of Europe's debt crisis on the U.S. economy.

The Institute for Supply Management (ISM) national survey reported a decline in its index to 53.5 in May from 54.8 in April. While a reading above 50 indicates growth, it was the first decline since February.

A similar index of a nine-state mid-America region that includes Minnesota registered 57.6 in May vs. 60.0 in April. Creighton University Prof. Ernie Goss, who oversees the study, said Europe's economic problems have begun to spill over into the region, with commodity prices weakening and the dollar gaining strength.

"Recent gains in the dollar have made U.S. goods less competitively priced abroad," Goss said.

Both surveys reported declines in exports in May. The fall-off was less severe in the regional index, where healthy export demand for farm-related products continued. "The one group that is not experiencing a downturn [in exports] is anything to do with agriculture," said Bob Kill, CEO of Enterprise Minnesota, a nonprofit consulting organization that works with small- and medium-sized manufacturers. "Agricultural and food handling equipment makers are bursting at the seams with activity," he said.

Minnesota was one of six states that showed slower growth in the Creighton study, although the decline was slight. Goss said the fall-off was due mainly to sluggish activity for companies that make nondurable goods, like processed food products.

The ISM study showed slower nationwide growth rates in production and employment in May. But its index for new orders was stronger, increasing from 58.2 in April to 60.1 in May. "That was a good sign," said Josh Bushard, manufacturing leader at audit, tax and advisory firm Grant Thornton's Minneapolis office.

Bushard said he was not surprised by the declines reported by both studies.

"We're getting closer to an election, and there's an increase in uncertainty," he said. Companies often react by pulling back on decisions to hire or ramp up production, he said. "As a firm, we're bracing for a slowdown in companies wanting to do projects with us in the second half of the year," he added.

Both studies also reported sharp declines in raw material prices. The price component of the ISM index plummeted from 61.0 in April to 47.5 in May, with almost 20 percent of those surveyed saying they paid lower prices for raw materials last month. It was this year's lowest reading.

Susan Feyder • 612-673-1723

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