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Manufacturing activity at 26-year low

Business research group says its index fell to recessionary level.

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By Ben Rooney, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- A key index of the nation's manufacturing activity fell to a 26-year low, sliding into recession territory, according to a purchasing managers group.

The Institute for Supply Management's (ISM) said Monday that its manufacturing index tumbled to 38.9 in October from 43.5 in September. It was the lowest reading since September 1982, when the index registered 38.8.

Economists were expecting a reading of 42, according to a survey conducted by Briefing.com.

The tipping point for the index is 50, with a reading below that indicating contraction in manufacturing activity. The index has hovered around the 50 mark since September 2007, with an average of 49.1.

A reading below 41 is considered a sign that the economy is in recession.

The October numbers are "well within recession territory," said John Silvia, chief economist at Wachovia economics group.

He said continued weakness in new orders, production and employment, "suggests recessionary conditions in the manufacturing sector for the fourth quarter."

Employment in the manufacturing sector fell for the third month in a row. ISM's employment measure registered 34.6 in October, down 7.2 points from September. It was the lowest reading for the employment component since March 1991, when it registered 33.6.

New orders for manufactured goods have been declining for nearly a year. In October, the ISM's measure of new orders fell 6.6 points to 32.2.

Factories have reported declining levels of production for the last 2 months, with a fall of 6.7 points in October to a reading of 34.1.

The part of the index that measures the prices manufacturers pay for raw materials declined 16.5 points to a reading of 37 in the month. It was the lowest point for the component since December 2001 when the prices index registered 33.2.

"Lower input prices would normally be a positive, but they're not a positive enough to get other elements to go up," Silvia said.

In a sign of growing economic weakness worldwide, the index's measure of export orders fell 11 points to a reading of 41. The decline came after 70 months of expansion.

Rising exports had been a bright spot for U.S. manufacturers as the domestic economy deteriorates. But last month's decline suggests that struggling consumers overseas are losing their appetite for U.S. exports.

The index also showed that factories and their customers are facing rising levels of inventory as orders dry up. The factoriy component rose 0.9 point to 44.3, and customer inventories grew 1.5 points to 55.

"It appears that manufacturing is experiencing significant demand destruction as a result of recent events, with members indicating challenges associated with the financial crisis, interruptions from the Gulf hurricane, and the lagging impact from higher oil prices," said Norbert Ore, chairman of the Institute for Supply Management's Manufacturing Business Survey Committee, in a statement.

Monday's report comes after the government said last week that the nation's economy shrank in the third quarter.

U.S. gross domestic product, the broadest measure of economic activity, fell at an annual rate of 0.3% in the third quarter, compared with a 2.8% growth rate in the second quarter.

Many economists say weakness in consumer spending, among other things, could result in a negative GDP reading in the fourth quarter. Two consecutive quarters of declining GDP are one of the classic, unofficial definitions of a recession.  To top of page

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