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Data show factory output is shrinking

Manufacturing-sector index is still hovering at a 5-year low. Worst hit is in construction.

NEW YORK - The nation's manufacturing sector shrank in May for the fourth consecutive month, according to a figures released yesterday.

The Institute for Supply Management said its manufacturing index rose to 49.6 from April's 48.6 percent. While that was a small gain and it beat economists' expectations of 47.9, it was below a reading of 50 - signaling that business for machine-tool-makers, chemical producers, food companies, and many other industries were contracting rather than expanding.

Moreover, it appears activity could continue to shrink. Order backlogs, an indication of future work, fell 5.5 percentage points lower than April, the institute said.

The report is "not a number that gives you a clear signal that things are going to improve dramatically. But given the overall report, it gives you some optimism," said Oscar Gonzalez, an economist at John Hancock Financial Services. "At least by this report, the economy is not heading into a severe recession."

The ISM index has been hovering near its lowest level in five years. Some of the most pronounced weakness is in businesses related to construction, as the worst housing slump in decades shows no sign of abating.

For manufacturers, prices they pay continued to rise for such raw materials as adhesives and scrap metal. The ISM's index of prices, which rose last month, is now the highest it has been since April 2004. Costs climbed for all commodities except zinc and methanol, a building block for chemical products from construction materials to windshield-washer fluid.

"Manufacturers find themselves caught between rising costs and weakening demand in many industries," Norbert J. Ore, chairman of ISM's manufacturing business survey committee, said in a statement accompanying the report. "Exports continue strong due to the weak dollar - without the weak dollar the story would be much more negative in manufacturing."

Paul Shipman, founder and CEO of Redhook Brewery in Woodinville, Wash., said prices for the primary ingredients for beer, malt and hops, stayed flat from 1982 until a few years ago.

"It's really quite intense," he said. "When we talk to smaller producers in the specialty-beer business, they're feeling it head on."

While inflation has battered U.S. consumers, the weak dollar has made U.S. exports cheaper for foreign buyers; as a result, exports grew at a 2.8 percent pace in the first quarter, boosting businesses throughout the economy.