Manufacturing shrinks for 1st time in 3 years

NEW YORK (CNNMoney.com) -- Manufacturing shrank for the first time in over three years in November, according to a closely watched survey of executives, as the slowdown in the housing and auto industries started to bite into the nation's industrial sector.

The report added to investor concern that the economy could slow further in coming months, sending stocks lower on Wall Street.

The Institute of Supply Management (ISM) said its November manufacturing index fell to 49.5 from October's 51.2. That was below the 52.0 predicted by analysts surveyed by Briefing.

A reading above 50 indicates growth in the sector while one below points to contraction.

In a separate report, which also fueled fears of slowing growth, the government said construction spending fell 1 percent in October, a bigger drop than forecast.

"The manufacturing sector is not immune to the housing downturn, and is directly affected by the troubles in the auto industry," Nigel Gault, an economist with Global Insight, said in a note to clients. "Strongly rising export orders are helping to dampen the slowdown - but can't prevent it."

"The weak signal from the ISM survey suggests sluggish growth in the overall economy ahead and points to Fed rate cuts in 2007. But the Fed is still worried about inflation overshooting its comfort zone so it will not be thinking of moving quickly," he added.

He said that the manufacturing results could be a sign of economic weakness at year-end.

"It's definitely an indicator that fourth-quarter GDP growth is going to be soft," he told CNNMoney.com. "It could be less than 1.5 percent, but I don't think it's going to be as low as zero, as some have predicted."

In its report, ISM said new orders, production and employment all fell in November, although exports showed strong growth on the recently weakened dollar. A falling dollar makes U.S. goods more attractive in overseas markets.

"New orders and production both ended growth cycles at 42 months during November," said Norbert Ore, chair of the ISM Manufacturing Business Survey Committee, in a statement. "On the positive side, growth in new export orders continued as the weaker dollar continues to fuel that segment."

In a sign that inflation pressures persist, the group's price measure rose to 53.5 from 47.0 the previous month.

Automakers including GM (Charts), Ford (Charts) and Chrysler (Charts) were set to unveil their sales figures Friday amid the weakening economic climate.

On Thursday, homebuilders got a boost as Banc of America analysts raised their outlook on the sector to "neutral" from "underweight." Hovnanian (Charts), KB Home (Charts) and Lennar (Charts) all saw gains.

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