US MFG. Imploding As Crisis Spreads Worldwide

by **deMolay** » Wed 01 Oct 2008, 21:00:41

U.S. Economy: Manufacturing Contracts Most Since 2001 (Update1)

By Timothy R. Homan

Oct. 1 (Bloomberg) -- Manufacturing in the U.S. contracted in September at the fastest pace since the last recession as the credit crisis spread beyond Wall Street.

The Institute for Supply Management's factory index dropped to 43.5, the lowest level since October 2001 and below economists' forecasts, the Tempe, Arizona-based group reported today. A reading of 50 is the dividing line between expansion and contraction.

Today's figures show that manufacturing, which had weathered a domestic slowdown because of record exports, is now starting to buckle as expansions from Japan to Germany falter with the global financial crisis. The housing slump has already spread to autos, and other industries may follow as mounting foreclosures, tougher lending rules and rising unemployment choke off spending.

``This sharp drop is putting maybe an exclamation point behind the word `recession,''' said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, referring to the ISM report.

Stocks slid and Treasuries climbed. The Standard & Poor's 500 index fell 0.4 percent to close at 1161.06, spurred in part by concern that General Electric Co.'s profits will dwindle as the company's finance unit shrinks. Yields on benchmark 10-year notes fell to 3.73 percent at 4:40 p.m. in New York from 3.82 percent late yesterday.

The ISM index was projected to drop to 49.5 from August's 49.9, according to the median of 72 economists' forecasts in a Bloomberg News survey. Estimates ranged from 48 to 51.1.

`On the Brink'

``Manufacturing could be on the brink of a collapse,'' said Lindsey Piegza, a market analyst at FTN Financial in New York. ``There are no orders, no jobs and there is really no incentive for businesses to invest. The credit crisis is compounding the problem.''

Other reports today signaled the U.S. continues to lose jobs. ADP Employer Services said companies in the U.S. cut an estimated 8,000 workers from payrolls in September after a 37,000 decrease in August, according to figures based on payroll data.

ADP said today's estimate didn't take into account a strike by about 27,000 machinists at Boeing Co. or the job losses following Hurricanes Gustav and Ike.

The government's September employment report is scheduled for release in two days. The Labor Department is forecast to report a ninth straight month of shrinking payrolls, the longest streak since the 15 months through May 2002, a period that encompassed the last recession. The unemployment rate probably held at 6.1 percent, according to the median forecast.

Firings Increase

Firing announcements increased 33 percent in September from that same month last year, Chicago-based Challenger, Gray & Christmas Inc. said in a statement.

The Commerce Department also reported that construction spending stalled in August after a revised 1.4 percent drop the previous month that was more than twice as large as previously estimated. Private residential building increased for the first time since March 2007 and work on commercial projects fell for a fourth month.

Orders from overseas have weakened as economies abroad falter. ISM's export gauge fell to 52 from 57 the prior month.

The purchasing managers' gauge of new orders for factories decreased to 38.8, also the lowest since 2001, from 48.3 the prior month. The production measure dropped to 40.8 from 52.1.

``I just can't imagine that we'll see a lot of strength in the index in the next few months,'' Norbert Ore, chairman of the ISM survey, said in a conference call. ``It appears to be very similar'' to the last recession in 2001, he said.

The index of prices paid plunged to 53.5, the lowest since January 2007, from 77. Energy prices have retreated from their peaks in July, when a barrel of crude oil reached $147.

Job Measure

The employment index declined to 41.8, the lowest since 2003, from 49.7 in August.

Companies are cutting back on investments and on hiring as consumer spending wanes. A deteriorating labor market also is causing Americans to limit purchases to necessities such as food and fuel.

Chrysler LLC, the third-largest U.S. automaker, said last week that it planned to fire about 250 workers as part of a plan to cut 1,000 salaried positions by Sept. 30. The Auburn Hills, Michigan-based company's U.S. sales dropped 33 in September compared with the same month last year, industry figures today showed.

Growth Outlook

The U.S. economy, the world's largest, probably grew at a 1.2 percent annual rate during the third quarter, down from 2.8 percent the prior three months, according to a Bloomberg survey of economists from Sept. 2 to Sept. 9.

Since then, economists at JPMorgan Chase & Co., Morgan Stanley and Deutsche Bank Securities Inc. have cut their forecasts as consumer spending stalled and the credit crisis brought down Lehman Brothers Holdings Inc., American International Group Inc. and Washington Mutual Inc.

A narrowing of the trade deficit as exports jumped and imports fell was the biggest contributor to growth in the second quarter, adding 2.9 percentage points, the most since 1980. That is likely to diminish as economies in Europe and Japan falter.

-- With reporting from Mike Ramsey and Bill Koenig in Southfield, Michigan. Editors: Carlos Torres, Chris Anstey

To contact the reporter on this story: Timothy R. Homan in Washington at [email protected]

Last Updated: October 1, 2008 16:55 EDT