UPDATE 1-NEXT UP-Regional data hints at resurgent U.S. ISM


(Updates ISM forecast, paragraph 2)

By Ros Krasny

CHICAGO, May 29 (Reuters) - Mostly pleasant surprises in U.S. regional factory surveys for May suggest the national picture is improving also, reinforcing the view that the economy is ready to break out of recession by year-end.

The Institute for Supply Management's national factory report for May is due on Monday at 10 a.m. EDT (1400 GMT), and that purchasing managers index is forecast to rise to 42.2 from 40.1 in April, according to 68 economists polled by Reuters.

If the index rise turns out to be as forecast, it would be at its highest since since September last year, and up from the low of 32.9 hit in December.

"Survey data have shown a slowing in the pace of manufacturing decline, and the forward-looking components indicate the sector may be close to a bottom," said Nicholas Tenev, economist at Barclays Capital.

Barclays tentatively looks for the ISM index to climb back above the 50 level, which separates contraction from expansion, by late 2009.

"Once it begins to bottom, the manufacturing sector tends to turn quickly," Tenev said. "In past recessions, the ISM manufacturing index has jumped an average of 12.9 index points over three months once it recovers to at least 40, as it did in April."

A string of manufacturing indices from regional Federal Reserve banks -- New York, Philadelphia, Dallas, Richmond and Kansas City -- all rose in May.

Meanwhile, the regional purchasing managers surveys -- many of which also have a strong manufacturing component -- were also mostly strong.

On Friday, the New York NAPM surged quite unexpectedly to 61.3 from 28.3 and the Milwaukee PMI rose for a third straight month to be almost back to year-ago levels.

The fly in the ointment, however, was the Chicago PMI, which reversed much of April's unexpectedly strong increase in tumbling back to 34.9 from 40.1.

"The economy is doing badly, but not horribly, and the Chicago number is horrible. It's out of line with what really is going on," said Cary Leahey, economist at Decision Economics in New York.

The result created some risk that the national ISM will not be as robust as expected, but many analysts attributed the plunge in the Chicago index to unrelenting woes in the automobile sector.

"We are inclined to view the weakness in the Chicago survey as being due to the disproportionate influence of the auto sector," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

Less publicized than the problems with the big car brands are drastic cutbacks at auto component makers, many of which are headquartered in the Midwest.

The latest casualties were Visteon Corp, the former parts unit of Ford Motor Co, and Metaldyne Corp, a supplier of metal-based auto components. Both firms filed for Chapter 11 bankruptcy protection on Thursday.

"At the start of the recession, production of motor vehicles and parts accounted for 6.6 percent of manufacturing output. Since then, manufacturing output has fallen 15.7 percent, with motor vehicles and parts production plummeting over 40 percent," said Tenev at Barclays Capital.

Analysts often look to the PMI for Milwaukee, some 90 miles up the road, for balance when the Chicago report appears to throw a curveball.

"The improved Milwaukee PMI means that the Chicago PMI clearly stands out as an exception. All the regional Fed surveys improved, and the New York NAPM rose sharply," said strategists at 4CAST Ltd. "We stick with our 43.5 ISM manufacturing forecast." (Additional reporting by Ellen Freilich in New York; Polling by Bangalore Polling Unit; Editing by James Dalgleish)



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