U.S. manufacturing drops during June, may lead to Fed stimulus for sector

July 2, 2012

The U.S. manufacturing sector fell below the level of expansion for the first time in three years, an indication to many that the industry may be given a boost by a potential round of stimulus from the Federal Reserve.

Reuters reported that the Institute for Supply Management noted that its index of national factory activity dropped from 53.5 in May to 49.

This number was far below the expectations of market analysts, as the projections were averaged at 52.0 from a survey put forth by the news outlet.

This marked the first time since July 2009 that the index has fallen below the 50 mark that distinguishes between expansion and contraction. Reuters reported that manufacturing has been one of the drivers of the U.S. economic recovery, which has now, despite an adjustment in business strategy by many firms, seemingly lost momentum over fears about the euro zone crisis.

"Clearly this is the biggest sign yet that the U.S. is catching the slowdown that is well under way in Europe and China," said Paul Dales, senior U.S. economist at Capital Economics in London.

The New York Times reported that some of the business executives who were surveyed by the ISM noted that reversals in new orders and exports had a significant effect on the optimism in the sector.

The deceleration of manufacturing has been linked to the inability of the U.S. economy to sustain a production surge in the first quarter of 2012, as Daniel Meckstroth, the chief economist for the Manufacturers Alliance for Productivity and Innovation, noted the ISM report may simply show that growth is slowing.

"The June I.S.M. report confirms that manufacturing production is irregular at times," Meckstroth said in a statement responding to the report. "We believe it is downshifting into a slow growth rate for the remainder of this year and into the first half of next year."

Reuters reported that analysts have noted that the ISM report increased the odds that the Federal Reserve will step in with a third round of bond buying.

This could help to increase economic activity in the U.S., which would in turn influence production levels and potentially help to restore the manufacturing sector to a track of growth.