Rising Energy Costs Hit Manufacturers

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Nov. 3, 2005--Activity in the nation's manufacturing sector dipped slightly in October, as firms struggled with higher prices for energy and raw materials, the Institute of Supply Management said this week.

While output was slower, owners continued to invest in new facilities, equipment, and workers, the Tempe, Ariz.-based group said Tuesday. That echoed an earlier report by the National Federation of Independent Business, which showed small businesses increasing capital outlays, while keeping a watchful eye on costs.

"Rising prices, and energy costs in particular, are of major concern as manufacturers are struggling to control costs," said Norbert Ore, chair of ISM's Manufacturing Business Survey Committee.

The group, which gauges industrial-sector growth based on monthly surveys of some 400 major firms in 20 industries, said its manufacturing index for October dropped to 59.1%, down from a 13-month high of 59.4% the previous month. Readings above 50% indicate growth.

Though slightly off pace, October marked the 29th straight month of expansion, the index showed, driven largely by strong consumer spending. Top performing industries have included electronic components and equipment, apparel, food, and paper.

But at the same time, the group's price index is inching up, reaching 84% last month, from 78% in September, its highest point since May 2004. Last month, companies in 18 of the 20 industries polled reported paying higher prices for all raw materials -- such as aluminum, copper, diesel fuel, gas, steel, and sugar -- except nickel. In responding to the survey, purchasing executives complained of "significant price increases" for commodities and expressed concern over depleting inventories.

As a result, new orders manufactured goods were down last month, dropping to 61.7% from 63.8%, with respondents describing new business as "sluggish."

By contrast, employment picked up, with the institute's index rising to 55% from 53.1%.

In September, small businesses also reported more capital outlays and employment, as more firms reduced inventories than increased them -- a development that NFIB chief economist William Dunkelberg called "an unusual occurrence."

"Look for inventory-building by small firms in the fourth quarter," Dunkelberg said.

As the consumer outlook remains gloomy, business outlays in coming months are expected to offset any possible decline in spending, market watchers say.

Already, spending on construction projects was up by 0.5% in September to an annual rate of $1.12 trillion, the Commerce Department said Tuesday.

Last updated: Nov 3, 2005




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