Contraction in The US Manufacturing Might Spell Doom

By TraderVox.com

Tradervox.com (Dublin)  – A report by Tempe, an Arizona-based group reported that the manufacturing in the US unexpectedly contracted in June. This is the first time a contraction has been registered since the US economy rose from recession in 2009. Most economists have indicated that the contraction is an indication of a faltering economy, which has raised speculations for third round of quantitative easing.

The ISM index fell from 53.5 registered in May to 49.7 for June indicating a contraction. Any reading below 50 indicates a contraction; the index reflects measures of orders, export demand, and production in the country. After the release, investors showed concern that the Europe debt crisis is taking a toll on the world’s largest economy hurting manufacturers such as Steelcase Inc. and DuPont Co. Analysts are expecting to see more vigilante consumers while companies are expected to cut back on investment. This will have a ripple effect on the employment data and the unemployment claims will probably rise.

According to Neil Dutta, who is the Head of US Economics in New York at Renaissance Macro Research LLC, said that the manufacturing in US is contracting as uncertainty weighs down on business. Further, he added that the Europe crisis has weighed on exports. The recent report on the ISM index is the lowest since July 2009, indicating a downward trend in the US economy. The index averaged 57.3 and 55.2 in 2010 and 2011 respectively. It is expected that this year the average will be at 53.5 on average.

However, Nigel Gault, has indicated that the economy is not in recession. Gault is IHS Chief US Economist in Lexington Massachusetts.  He said that recession is accompanied by ISM readings of lower 40s, where 42.6 is the level that generally shows an expansion in the whole economy. Another report from the Commerce Department showed an improvement in the housing sector where purchases of new houses rose by 7.6 percent in May which is the highest level since 2010.

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