U.S. manufacturing sinks
The NAPM says manufacturing activity tumbled again in October.
NEW YORK (CNNmoney) - U.S. manufacturing activity shrank for the fifteenth straight month in October, the nation's purchasing managers said Thursday, as the sector continued to bear the brunt of a slowdown in the world's largest economy.|
In the months prior to the Sept. 11 terrorist attacks, manufacturing was actually showing signs of recovery. All that has changed dramatically as plunging demand in the wake of the attacks has only deepened the sector's recession.
"The manufacturing sector received a very significant setback driven by the events of Sept. 11," said Norbert Ore, chair of the National Association of Purchasing Management (NAPM) survey committee. "The sector appeared to be well on its way to recovery, but will have to begin anew to build its way into a growth scenario."
The NAPM said its Purchasing Managers Index sank to 39.8 from 47.0 in September, the steepest one-month drop since May 1980, when the index fell 8 points. A reading below 50 means activity is shrinking, while a reading above 50 means it's expanding. And a reading below 42.7 over a period of time means the overall economy generally is shrinking, the NAPM said.
It was the 15th straight month of contraction for the sector and the lowest reading since January 1991, when the index was at 39.4. Wall Street economists had expected a much better reading of 44.0, according to Briefing.com.
On Wall Street, stocks recovered from the initial shock of the NAPM report and moved higher in late morning trading. Treasury bond prices were mixed, with the 30-year continuing its strong rally after Wednesday's news that the government planned to discontinue the security.
In a conference call, Ore also said the sector usually takes six to nine months to recover from such steep declines, and this decline likely will be no different. Ore also said he expected the pace of job cuts in the sector to accelerate in the coming months, according to a Reuters report. The NAPM's Employment Index fell in October to 35.1 from 41.2.
Job cuts have led to steep drops in consumer confidence and spending, which already were weak even before Sept. 11. The Commerce Department said Thursday that consumer spending, which fuels two-thirds of the U.S. economy, fell at a 1.8-percent rate in September, the fastest decline in more than 14 years.
"With consumers not spending, is it any surprise that the manufacturing sector has stumbled?" said Joel Naroff, chief economist at Naroff Economic Advisors.
And the Labor Department said new jobless claims fell to 499,000 last week from a revised 509,000 a week earlier, meaning that companies, faced with slowing demand and slumping profits, kept cutting jobs.
The NAPM's New Orders Index plunged to 38.3 in October from 50.3 in September, illustrating how demand for new products dried up in the wake of the attacks.
"Manufacturers are not fools, and they looked out over the economy and saw that economic activity had slowed dramatically," Naroff said. "Not wanting to carry inventories, they slashed production and workers. They acted correctly, but the downward spiral has been set in motion."
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Still, consumer spending apparently recovered quickly from abominable levels in the immediate aftermath of the attacks to levels that were merely weak, meaning manufacturing likely will recover from its latest plunge as well.
"This plunge could reflect shock and could rebound if consumers keep buying cars and visiting malls as much as anecdotes indicate they have in recent weeks," said David Orr, chief economist at Wachovia Securities.
To keep consumers spending and a recession at bay, the Federal Reserve has cut its target for short-term interest rates nine times this year -- twice since the attacks -- and is widely expected to do so again after its next policy meeting on Nov. 6. Still, most economists think a recession, commonly defined as two consecutive quarters of shrinking gross domestic product (GDP), is inevitable.
In a separate report, the National Association of Manufacturers (NAM) said a survey of their member's expectations for growth in the coming months found more than 60 percent expected a recession in their industries lasting from the fourth quarter of 2001 to the first quarter of 2002.
Only about a fourth of those surveyed expected negative GDP in the first two quarters of 2002, but about 60 percent expected meager economic growth of between zero and 2.0 percent.
The U.S. Congress is working on a package of tax cuts and spending to stimulate the economy. The House of Representatives recently passed a bill that focused largely on delivering tax cuts, especially to corporations, in the hopes that companies will be encouraged to spend more money on production.
Critics of that approach, including most Democrats, say businesses won't spend to increase production until demand improves and that the government must fuel demand with spending and tax cuts targeted to lower-income individuals.
"Business tax cuts may save the corporate bottom line a little bit, but they will neither induce new investment nor increase production," Naroff said. "Only a rise in spending will do that."
Still, many economists expect the Fed rate cuts, combined with some manner of fiscal stimulus from Congress, will provide an explosive boost to the economy next year.
"That act on Sept. 11 made all economic numbers coming out useless in terms of trying to determine an overall trend in economy," said Robert Goodman, chief economist at Putnam Investments. "More important are the policies that are going to affect future statistics, and they are good."
"Because there was such a sharp drop, the snap-back is going to be that much more violent on the upside," Goodman added.
In a separate report, the Commerce Department said construction spending fell for the fifth month in a row in September, dropping 0.4 percent to a rate of $843.1 billion, the lowest since last December. The reading was better than forecasts for a 0.7 percent decline.