Factories, Consumers in Sharp Decline


The nation’s manufacturing economy in October sank into its deepest slump since the Gulf War recession, as fallout from the Sept. 11 terrorist attacks did more damage to an already weakened sector. Hopes that free-spending consumers would keep the broader economy afloat were likewise dashed as spending dropped by the largest amount in 15 years.

The Commerce Department said Thursday that consumer spending dropped 1.8% in September. That was double what experts had expected after a 0.3% gain in August. It was the first decline in what had become the economy’s anchor in 21/2 years and it marked the steepest spending drop since January 1987.

With consumers sitting on the sidelines, new orders for manufactured goods plummeted, driving factories to slash production and ax more workers.

The National Assn. of Purchasing Management said its monthly gauge of factory activity plunged to 39.8 in October, from 47 in September. Analysts had been expecting a reading of around 44.5.


A reading above 50 signifies growth in manufacturing activity, whereas a figure below 50 shows contraction. October spelled the 15th consecutive monthly drop for the NAPM index--and disappointment for industry watchers who had thought the worst was over.

“The manufacturing sector received a very significant setback driven by the events of Sept. 11,” said Norbert J. Ore, chair of the NAPM’s Business Survey Committee. “I think we’re looking at another six to nine months of weakness.”

On Wall Street, however, the grim economic news was trumped by expectations of a Microsoft settlement--with the Dow Jones closing at 9,263.90, up 188.76 points or 2.1%.

The NAPM index is closely tracked because it offers an early reading on the health of manufacturing. It is based on a survey of purchasing executives who buy the raw materials for production at more than 350 U.S. companies.


Economist Esmael Adibi of Chapman University in Orange said the October plunge in the NAPM index was particularly striking because U.S. manufacturers had been paring inventories in response to weakness in factory orders that started last year.

“That gives you an idea of just how weak the demand is,” Adibi said. “Even very low levels of inventory look too high.”

That’s bad news for factory workers, who have borne the brunt of the mass layoffs sweeping the economy. Nearly 1 million manufacturing workers have lost their jobs since July 2000. In California, nearly 66,000 factory hands have lost their jobs this year.

The National Assn. of Manufacturers on Thursday said more than 60% of manufacturing executives it recently surveyed expect their industry to be in recession through the first quarter of 2002, while 30% figure growth will be less than 2% over the same period.


The survey “paints a grim picture of the months ahead,” said NAM President Jerry Jasinowski.

Doldrums in consumer spending and manufacturing, which together account for more than three-fourths of U.S. economic activity, signal that the economic contraction that began in the third quarter may just be gaining steam.

Adding to the economy’s woes, separate government reports on Thursday revealed that U.S. construction spending fell for the fifth month in a row in September, dipping 0.4%, while nearly half a million Americans lined up to claim first-time unemployment benefits last week.

Thursday’s numbers were a grim prelude to Friday’s bellwether nonfarm payrolls report, which is expected to show the unemployment rate rose to 5.2% in October from 4.9% the month before, with the economy shedding an additional 289,000 jobs.


In an effort to bolster the economy, the Federal Reserve has cut interest rates nine times this year, with two reductions coming after the attacks. A 10th cut is expected when the central bank meets Tuesday.

But many economists now believe a recession may be inevitable because of the economic fallout from the attacks., including the loss of billions in business.


Times wire services were used in compiling this report.