Chicago purchasers' index shrinks at fast pace

U.S. business activity contracted at a faster pace than forecast this month as orders and employment dropped.

The Institute for Supply Management-Chicago Inc. said today its business barometer decreased to 34.9 from 40.1 in April. Readings below 50 signal a contraction.

Rising unemployment and banks' reluctance to lend may weigh on spending, making it difficult for factories to recover from the worst economic slump in at least a half century. Private economists have scaled back forecasts for economic growth in the second half of the year.

"Businesses are just not going to be of the mindset to add capacity when they have so much excess production capacity," Derek Holt, an economist with Scotia Capital in Toronto, said before the report.

Stocks erased earlier gains after the report. The Standard & Poor's 500 Stock Index was little changed at 906.91 at 10:06 a.m. in New York.

Economists forecast the gauge would rise to 42, according to the median of 55 projections in a Bloomberg News survey. Estimates ranged from 34.2 to 45.

A separate report today showed the economy shrank at a 5.7 percent pace in the first quarter, less than the government estimated last month. Following a 6.3 percent slump in the last three months of 2008, the decline capped the worst six-month performance in five decades.

National Forecast

Economists watch the Chicago index for an early reading on the outlook for overall U.S. manufacturing, which makes up about 12 percent of the economy.

Prior to the Chicago report, economists forecast the Institute for Supply Management's national manufacturing index, due June 1, probably climbed in May for a fourth consecutive month, signaling a slower pace of decline, according to the Bloomberg survey median.

The Chicago report ran counter to others this month that indicated manufacturing started this quarter on sounder footing. The Federal Reserve Bank of New York factory index rose to minus 4.6, the highest level since August, and the Philadelphia Fed gauge climbed to an eight-month high.

The Chicago purchasers' orders index fell to 37.3 from 42.1, the employment gauge fell to 25, the lowest level since January 2002, from 31.8.

Production

The production index was unchanged at 38.1 this month.

The government is scheduled to release its May employment report on June 5. The U.S. has lost 5.7 million jobs since the downturn began in December 2007.

A measure of prices paid for raw materials increased to 29.8, from 28.4 the prior month, the lowest level since 1949. A gauge of delivery times fell to 43 from 45.4.

Fed policy makers, in a statement following their April meeting, cited improved financial conditions, stronger business and household sentiment, and expectations of an increase in industrial production to replace inventories, as reasons why the pace of economic contraction will probably ease.

Deere & Co., the world's largest maker of farm equipment, had a second-quarter profit that topped analysts' estimates, helped by "strong" sales of agricultural machines. Even so "I think it's early for anybody in this economy to declare victory, relative to the global recession," Chief Financial Officer Mike Mack said May 20 on a call with analysts.

Automakers continue to struggle. Chrysler LLC this month idled its 22 U.S. plants after filing for bankruptcy. General Motors Corp. also has cut output as a bankruptcy deadline looms.

Visteon Corp., the former parts-making unit of Ford Motor Co., filed for bankruptcy protection May 28 after revenue fell. In the U.S., automakers' sales plunged 37 percent through April from the same time last year, with sales at Ford dropping 40 percent.