Manufacturing index shows a decline
For the first time in almost four years, the nation’s manufacturing sector has shrunk, and the contraction is setting off warning flares for the job market, economists said Friday.
In a widely watched report, the Institute for Supply Management, a trade group based in Tempe, Ariz., said its manufacturing index came in at 49.5 in November, below October’s reading of 51.2. A reading of less than 50 indicates that the sector is contracting.
Manufacturing had been growing since June 2003.
Industries including wood, furniture, appliances, fabricated metal and transportation equipment slipped last month, hit by a housing market slump and bloated automobile inventories.
The index was one of two worrisome economic reports Friday. The Commerce Department said that construction activity in October plummeted by the largest amount since 2001 and that home building fell for the seventh month in a row, the longest decline on record.
Both reports raised concerns that the economy might be in for a hard landing, and stocks and the dollar fell.
The manufacturing and construction spending reports could be more pieces of an economic puzzle that would guide the Federal Reserve to keep interest rates level or cut short-term rates sooner than economists were expecting. The Fed raised rates for the 17th consecutive time in June but has held them at 5.25% since then.
Fed policymakers, who meet Dec. 12, will also consider next week’s service sector report from the supply management institute. Although the service sector has outperformed the manufacturing sector in recent months and grew more quickly than analysts expected in October, Wall Street is expecting to see slower growth in the November reading.
Zoltan Pozsar, an economist at Moody’s Economy.com, said that the construction and auto industries might have pushed the manufacturing index down but that, at most, they made up a third of the industrial base.
“Orders and production will be soft going into next year” but will firm up once excess inventory is worked off, he predicted.
Pozsar also said the contraction would hit employment. He estimated that 30,000 jobs were lost in housing-related industries in November and 300,000 more will be lost in the coming year, on top of 100,000 housing jobs lost since March.
“The job market seems a lot weaker than it was a year ago, which points to soft holiday shopping,” Pozsar said. He expects the trend to intensify as the housing slump translates into people feeling less wealthy than when home prices were higher.
The manufacturing report said employment in the sector shrank in November, with a 49.2 reading, compared with 50.8 in October.
The new orders index fell to 48.7 from 52.1 in October. The production index also contracted, to 48.5 from 51.9.
The prices-paid index rose to 53.5, after falling to 47 in October. The prices-paid index reflects raw materials costs to manufacturers. Prices had been falling until recently, as oil prices have rebounded after falling about 20% since the summer.