Manufacturing index tumbles

Survey of purchasing managers shows factory activity fell more than expected in September.

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By Lara Moscrip, CNNMoney.com contributing writer

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NEW YORK (CNNMoney.com) -- A key measure of the nation's manufacturing activity fell in September to a nearly seven-year low, nearing a benchmark that indicates a recession, a purchasing manager's group said Wednesday.

The Institute for Supply Management's (ISM) manufacturing index fell to 43.5 in September, down from the August reading of 49.9. It was the lowest reading since the 40.8 measure in October 2001, the month following the terrorist attacks on New York and Washington.

Economists were expecting a reading of 49.5, according to a consensus estimate compiled by Briefing.com.

The tipping point for the index is 50, with a reading below that indicating contraction in factory activity. A reading below 41 marks a recession. The index has hovered around the 50 mark for the past 12 months, with an average of 49.6.

The sharp decline of key indicators such as employment, new orders and production is the most troubling aspect of the report, said John Silvia, economist at Wachovia. The weakness in those sectors will serve to make a 'pretty miserable' outlook for fourth-quarter industrial production, he said.

Employment is especially weak, which will weigh on personal income, further supressing consumer spending. That the index didn't sink to the technical standard indicating a recession doesn't matter, Silvia said.

"We're in a recession. What are you going to do? We're not going to be able to fudge this," he said.

In what could be a portent of Friday's September employment report, ISM's employment indicator tumbled to 41.8 from 49.7, marking the second month of decline in the sector.

Economists from Briefing.com expect job losses to spike to 105,000 in September and for the unemployment rate to remain steady at 6.1%

New orders contracted sharply, falling to 38.8 from 48.3 the month before. That marked the 10th straight month of decline in that sector.

Inventories contracted at a faster pace for the third month in a row, falling 5.9% to 43.4 from 49.3 in August. A decline in inventories suggests that firms intend to continue to cut production going forward as they get used to slower economic growth, Silvia said.

ISM's production measure contracted sharply in September to 40.8 from its prior reading of 52.1.

Exports grew, but at a slower pace than in August. There was less cost pressure on most firms, as prices continued to increase, but at a slower pace from the month before.  To top of page

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