U.S. factory output shrinks
U.S. factory production shrank in December for the first time in nearly a year, adding to fears that the economy may be headed for recession and helping send stocks sharply lower.
The Institute for Supply Management’s manufacturing index, which had slipped considerably in the second half of 2007, plunged to 47.7 last month, its weakest level since April 2003, according to the report released Wednesday. A reading below 50 indicates contraction.
A drop in new orders also hinted at softening demand, even as companies paid higher prices for raw materials. The report darkened the outlook for the overall economy.
“This will fan recession concerns,” said Stephen Gallagher, U.S. chief economist at investment bank Societe Generale.
The most severe housing slump in more than a decade has underpinned such fears. Construction spending rose 0.1% in November, but private home building saw its biggest decline in six years.
The surprisingly weak factory report sent stocks lower and bond prices higher and sparked worries that Friday’s jobs report could also reflect similar weakness. The Dow Jones industrial average fell 220.86 points, or about 2%.
Credit markets have been experiencing turmoil in recent months as a crisis that began in housing spread into other areas of finance, raising fears of greater repercussions for the broader economy.
The economic data further muddy an unclear interest rate outlook. Federal Reserve officials seem reluctant to continue cutting interest rates given persistent price pressures, including those reported by the Institute for Supply Management’s survey participants.
At the same time, the retrenchment in factory activity seems to require further stimulus from the central bank, if only to avert a more prolonged economic slump.
The predicament was underscored in minutes from the Fed’s December meeting released Wednesday, which pointed to heightened concern about growth and inflation.
“You can’t lower rates without stimulating inflation pressures, and you can’t raise rates because the economy is stalled,” said Hugh Moore, a partner at Guerite Advisors in Greenville, S.C. “They’re trying to keep their options open but they really have limited flexibility.”
Analysts worry that if businesses and consumers get into a rut at the same time, an already faltering economy could be in for serious trouble.
“Manufacturing leads the rest of the economy,” said Norbert Ore, chairman of the ISM manufacturing business survey committee.
Already, weekly reports from chain store sales pointed not only to a lackluster holiday shopping season but also to weak post-holiday bargain hunting. Chain store sales fell 0.2% in the latest week, according to the International Council of Shopping Centers. Data from Redbook Research pointed to a 0.7% decrease.
