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Wall Street Journal: JUSTIN LAHART And KRIS MAHER
U.S. manufacturing grew at a brisk pace last month, drawing strength from export orders that continue to expand rapidly despite Europe's financial woes.
The Institute for Supply Management said Tuesday that its index based on a survey of purchasing managers came in at 59.7 in May, down slightly from April's 60.4. Any reading over 50 indicates that manufacturing is expanding.
MoreSortable Chart: Manufacturing activity by country.
Zach Pandl, an economist at Nomura Securities International, said the report "shows us the recovery is quite durable at this point and is unlikely to be significantly damaged by turmoil in financial markets."
Economists have worried that Europe's difficulties could stunt or reverse the global recovery now under way. This is especially worrisome at a time when economies, including that of the U.S., are counting on exports to help fuel their own growth.
After getting hit hard by the recession, U.S. manufacturing has bounced back strongly over the past year. Orders have been expanding to the point that some companies, particularly in the technology sector, have begun to complain of shortages of electronics and other components. In addition, manufacturers have begun hiring and buying capital equipment to meet demand.
Much of that demand has been coming from abroad. Within the manufacturing report, an index of export orders rose to 62 in May—its highest level since 1988—from 61 in April.
"We've got orders coming in from Europe, we've got orders coming in from Japan, China, India and Russia," said Michael Zimmer, president of Cyril Bath Co., of Monroe, N.C. "They're coming in fast and at record levels."
The company, which builds machines used in the aircraft industry and also sells airframe components, has so far seen little fallout from Europe's financial crisis. The jet-engine makers that Cyril Bath counts among its customers are stepping up production as Boeing Co. produces its 787 Dreamliner and Airbus prepares for its competing A350.
The biggest challenge that Europe's crisis poses to U.S. manufacturers like Cyril Bath is through the euro, Mr. Zimmer said. Since the start of the year, the euro's value has fallen substantially against the dollar. That makes it easier for European companies to compete with their U.S. counterparts on prices. In part because of the decline in the euro, Cyril Bath has recently shifted some production to a sister company in Nantes, France.
In Europe, the financial crisis's effect on manufacturing activity has been modest so far. On Tuesday, survey firm Markit Economics reported that its purchasing managers' index for the 16 countries that use the euro fell to 55.8 in May from 57.6 in April. As with the U.S. index, anything over 50 signals growth.
Even though Jagemann Stamping Co. hasn't seen a sharp drop-off in business, company executives are concerned about its exposure to Europe.
"We're still seeing solid order rates, but new order rates have slowed as the dollar has continued to strengthen," said Ralph Hardt, president of the Manitowoc, Wis., maker of fuel-systems components. "Europe is definitely slowing down."
Jagemann has tightened its credit policies for some customers in Europe, demanding payment within contract terms and asking for parent-company guarantees. Exports account for about 35% of Jagemann's sales, with 15% of its sales going to auto suppliers in Europe, including Germany, the Czech Republic, Poland and Spain.
Rising commodity prices are a bigger concern for him than currency issues, Mr. Hardt said. He estimated that his costs for stainless steel and aluminum—the biggest inputs for the fuel systems Jagemann makes—were up 30% to 50% year-over-year.
Any slowdown in Europe may be offset by growth in developing nations like China and Brazil.
Strong demand from Asia for products like big excavators used in the mining and energy sectors is fueling export growth at Caterpillar Inc., the world's largest maker of heavy equipment. In the first quarter, Caterpillar recalled or hired 1,500 workers, including 600 in the U.S., to meet increasing orders, including at a plant in Lafayette, Ind., that makes diesel engines used in the natural-gas industry, and at a Decatur, Ill., plant that makes large mining trucks. "For some of our large mining trucks, we're already sold out for the year," said Jim Dugan, a Caterpillar spokesman.
Deere & Co., of Moline, Ill., likewise sees uneven global demand, with farm-machinery sales expected to increase 25% in South America, driven by Brazil and Argentina, which are benefiting from strong commodity prices for soybeans and sugarcane, government financing and improved weather.
When it reported results last month, the company said that even though sales in Central Europe and among former Soviet republics would "remain under pressure as a result of challenging economic conditions," it expected an increase of 9% to 11% in world-wide sales overall for 2010 in its agriculture and turf division, which makes harvesting machines used on farms and residential riding mowers.
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