Manufacturing flat in July as exports keep growing

— Higher prices, tight credit and a gloomy economy kept U.S. manufacturers from growing in July, but exports helped prop them up.

The Institute for Supply Management said its reading of activity from the country's producers of cars, airplanes, appliances and food hit 50, down from 50.2 in June.

That beat economists' prediction of a reading of 49.2, according to the consensus estimate of Wall Street economists surveyed by Thomson Financial/IFR. A reading above 50 signals growth.

The report has been hovering near 50, which economists call "the boom-bust line," for the last 12 months.

New orders fell to 45.0 from 49.6, hitting the lowest level since October 2001, immediately after the Sept. 11 attacks.

"One soft month proves nothing, but this is a startling development; the next couple of months' numbers need to be watched very closely," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y.

The index of prices manufacturers pay for raw materials grew, but at a slower rate than June, when it hit its highest level since 1979. About 88.5 percent of manufacturers said prices in July were higher than June. No commodities prices fell, according to the report.

At Columbia Gear Corp., a 385-person gear maker based in Avon, Minn., vice president of sales and marketing Lyle Nuhring said steel suppliers that used to change their fuel surcharges every quarter are now changing them every month.

The company's customers are growing increasingly resistant to Columbia's resulting price increases, asking to see invoices Columbia gets from its suppliers as proof of higher prices the company is paying, Nuhring said.

"It's increasing every month and you can't keep going back to them every month," he said.

Kevin O'Marah, chief strategist at AMR Research, a manufacturing industry consultant, said he expects manufacturer price increases to continue.

"If you're a manufacturer, you're not going to go into losses to absorb the higher costs of plastic resins and corn syrup," he said. "You'll cut production and raise prices. You will not just eat it."

Exports continue to help manufacturers, however. The rate of growth for exports slowed, but it was the 68th straight month that exports grew, thanks to the weak dollar.

Industries reporting growth included electronics, food, petroleum, metals, paper and chemicals.

Stocks dropped for the second day after a two-day rally earlier in the week. In morning trading, the Dow Jones industrial average was down 51.78 to 11,326.24. The Standard & Poor's 500 was down 6.43 to 1,260.95 and the Nasdaq composite was down 23.58 to 2,301.97.