Manufacturing index at 26-year low

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NEW YORK (CNNMoney.com) -- A closely watched index of the nation's manufacturing activity fell to a 26-year low in November and stands at a level indicating overall economic contraction for the second straight month.

The Tempe, Ariz.-based Institute for Supply Management, a purchasing management group, said Monday its manufacturing index declined to a reading of 36.2 in November from 38.9 in October. It was the lowest reading for the index since May 1982, when the economy was mired in recession.

November's reading was also well below the consensus forecast of 38 that economists surveyed by Briefing.com had expected.

The tipping point for the index is 50, with a reading below that indicating that manufacturing activity is shrinking. A reading below 41 is typically associated with a recession in the broader economy.

"Manufacturing is in free fall," said Ian Shepherdson, chief U.S. economist at research firm High Frequency Economics, in a note to clients. "This survey promises continued recession."

The part of the index that measures prices paid by manufacturers for raw materials plummeted 11.2 points in November to 25.5. It was the lowest reading since May 1949, nearly 60 years, when it registered 20.1.

While lower prices can provide some relief for struggling businesses and consumers, the dramatic decline in prices over the last few months has many economists worried about the prospect of deflation.

Deflation occurs when prices fall as a result of weak demand. That can force businesses to cut costs by eliminating jobs, which undermines consumers' purchasing power and further weakens demand.

The report is "weak across the spectrum," said Bob Brusca, an economist at Fact and Opinion Economics. "Clearly, employment, new orders and output are getting hit hard," he said.

Employment in the manufacturing sector declined for the fourth month in a row. The employment index fell 0.4 to a reading of 34.2 in November, according to the index.

The index showed that new orders for manufactured goods fell 4.3 points to a reading of 27.9 in November from 38.9 the month before. New orders have been declining for 12 months in a row.

Manufacturers reported that order backlogs fell another 2.5 points in the month to 27 from 29.5. It was the lowest level since the ISM started tracking backlog data in 1993.

Monday's ISM report follows similar reports on the manufacturing sectors in Europe and China that also showed severe weakens.