US Factory Index Drops Amid Auto, Housing Weakness (Update1)

By Bob Willis. April 2 (Bloomberg) -- Manufacturing growth in the US slowed
in March and an index of costs rose to the highest since August as weakness
in ...

April 2 (Bloomberg) -- Manufacturing growth in the U.S. slowed in March and an index of costs rose to the highest since August as weakness in auto demand and a slump in housing restrained production, an industry report said.

The Institute for Supply Management's manufacturing index fell to 50.9 from 52.3 in February. Readings of more than 50 signal expansion.

Businesses are holding back on investment in capital equipment and are sitting on stockpiles of unsold goods, government reports last week indicated. That's keeping a lid on production growth at companies such as Siemens Energy & Automation, a Georgia-based supplier of equipment to builders and manufacturers.

``Business turned down their factory operating rate a little last month,'' Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report. ``Business spending on capital equipment is off this year, and this report is in keeping with the more cautious attitude.''

Economists surveyed by Bloomberg News had expected the manufacturing index to fall to 51.4 from 52.3 the prior month. Forecasts in the survey ranged from 48 to 55. The index averaged 53.9 in 2006 and fell below 50 in November and January.

An index of prices paid jumped to 65.5, the highest since August, from 59.

Orders, Production

The Tempe, Arizona-based institute's new orders index, which makes up about a third of the total, decreased to 51.6 from 54.9. The production index, a measure of work being performed, fell to 53 from 54.1.

The institute's supplier deliveries gauge, which covers how long it takes companies to receive goods, rose to 51.3 from 50.8 last month. The measure of orders waiting to be filled fell to 47 from 51.5 in February.

The inventory index increased to 47.5 from 44.6.

Norbert Ore, director of the ISM survey, said in March he expects manufacturing to grow at a slow pace for several months. It would take six months of consecutive below-50 index readings to signal a sustained contraction in manufacturing, he said.

The economy grew at a 2.5 percent pace in the fourth quarter following a 2 percent rate of expansion in the third quarter, the government said last week. Inventories accumulated more than previously estimated in the last quarter of 2006, the report showed.

Equipment, Software Spending

Business spending on equipment and software fell 4.8 percent in the fourth quarter, subtracting 0.36 percentage point from growth, according to the report.

Companies continued to slow the pace of orders in the first quarter to work off stockpiles. A report last week from the Commerce Department showed durable goods orders excluding transportation equipment fell in February for a second month, reflecting reluctance of companies to buy new machinery and equipment until inventories are reduced further. Manufacturing output fell in three of the five months through February, according to Federal Reserve figures.

In a sign the inventory drawdown may be approaching its end, a report March 30 from the National Association of Purchasing Management-Chicago said its barometer of business activity for last month posted its biggest increase since 1968. Measures of production and new orders surged, while inventory levels declined.

``The inventory adjustment process may have largely run its course in the motor vehicle sector, but remaining imbalances in some other industries may continue to impose some restraint on industrial production for a time,'' Fed Chairman Ben S. Bernanke told Congress last week.

Dallas-based Texas Instruments Inc., a leading maker of semi-conductors, sees declining inventories setting the stage for future demand.

Inventories

``Customer inventory levels have continued to improve and in demand, trends have remained solid,'' Ron Slaymaker, vice president for investor relations at Dallas-based Texas Instruments Inc., said on a conference call March 12.``We believe growth is likely to resume again in the second quarter.''

Dennis R. Sadlowski, chief operating officer of Siemens Energy & Automation, a Siemens AG unit that makes and delivers power distribution and automation equipment, said in an interview last week that companies were more careful about making investments.

``We see slowing but still growing markets and a slowing but still growing investment profile overall,'' said Sadlowski. ``Things associated with residential construction and building materials are still slowing down.''

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