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U.S. manufacturing down
August 1, 2001: 11:10 a.m. ET

NAPM index shows slowdown continues to pressure industry
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NEW YORK (CNNfn) - U.S. manufacturing weakened for the 12th consecutive month in July, the nation's purchasing managers said Wednesday -- more bad news for the sector that's borne the brunt of the slowdown in the world's largest economy.

The National Association of Purchasing Management (NAPM) said its key index of manufacturing activity, the Purchasing Managers Index, fell to 43.6 in July from 44.7 in June. Economists polled by expected a reading of 44.7.

"The manufacturing sector is in its 12th month of decline and appears to continue to lack drivers that will stimulate recovery," said Norbert Ore, chairman of NAPM's business survey committee.

A reading below 50 indicates a shrinking manufacturing sector, while a reading below 42.7 percent points to contraction in the overall economy, according to the group, whose members buy materials for about 300 of the nation's biggest companies.

Though July's reading was better than January's decade-low of 41.2, the index has been below 50 for 12 straight months, and NAPM sees that as a sign that a broader economic recession may not be out of the question.

"We are going to border on that recession probably for the next couple of months," Ore said.

Separately, construction spending fell 0.7 percent in June, the Commerce Department reported, weaker than both May's revised drop of 0.2 percent and Wall Street forecasts for a slight increase.

U.S. stocks showed little reaction to the news, holding on to early morning gains, while U.S. Treasury bond prices fell slightly.

Another rate cut likely

The manufacturing sector's protracted recession has been the worst aspect of a year-long economic slowdown in the U.S. economy. The Federal Reserve has cut its target for short-term interest rates six times this year in an effort to at least keep consumers spending and avoid a recession in the larger economy.

The Fed and other economists fear that the slowdown in manufacturing could bleed into the larger economy, especially if the hundreds of thousands of job cuts resulting from the slowdown begin to hinder consumer spending, which makes up two-thirds of the economy.

"[Wednesday's NAPM] data indicate that the manufacturing sector is still in deep trouble," said Steven Wood, economist with FinancialOxygen. "The downside risks to the economy still predominate; the [Fed] will cut rates again [at its next policy meeting] Aug. 21 and probably afterwards as well."

Click here for more on the Fed and rates

The NAPM new orders index, a crucial indicator of demand for factory goods in the pipeline, slipped to 46.3 from 48.6 in June. While new orders slipped in July, they were in somewhat better shape than earlier this year.

The report also showed firms liquidated inventories at a quicker pace. Manufacturers must clear out overstocked shelves before production can rev up again. The NAPM inventories index fell to 35.8 from 40.8 in June.

"The big dip in inventories is a good sign if we are looking for a glimmer of hope here," said Sherry Cooper, chief economist at BMO Nesbitt Burns. "Maybe we are at a stage where production can pick up again."

On another positive note, manufacturers faced lower prices for raw materials and inputs for a fifth straight month. But the report noted that falling prices were a double-edged sword, indicative of deteriorating pricing power for finished goods.

The NAPM prices index fell to 38.7 in July from June's 42.3 reading. graphic

- from staff and wire reports


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