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U.S. Manufacturing Sector Contracts

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VINNEE TONG | January 3, 2008 03:36 AM EST | AP

NEW YORK — The U.S. manufacturing economy unexpectedly contracted in December, ending a streak of 10 consecutive months of growth and sinking to its lowest point in almost five years, a private research group said Wednesday. The decline suggests that the overall economy may be weakening faster than some economists predicted.

The figures are closely watched because a slowdown in factory production can translate to job cuts, which in turn reduces consumer spending _ a major component of the economy.

The Institute for Supply Management, a Tempe, Ariz.-based private research group, said its manufacturing index registered 47.7 last month, down 3.1 percentage points from the 50.8 recorded in November. A reading above 50 indicates growth; below that level indicates contraction.

The December results were weaker than the 50.9 expected by analysts polled by Thomson/IFR Markets. Last month was the first that manufacturing has failed to grow since January 2007, when the index was 49.3. It has been four years and eight months since the index was lower than in December; it hit 46.4 in April 2003.

The results sent stocks falling in morning trading as investors worried that the slowdown in manufacturing would spread to the overall economy. The Dow Jones industrials fell more than 160 points by midday.

Meanwhile, the Commerce Department reported Wednesday that construction spending edged up slightly in November as the continued housing slump was offset by record spending on government and business projects. Spending was up 0.1 percent in November to a seasonally adjusted annual rate of $1.165 trillion. Spending had fallen by 0.4 percent in October.

Many economists believe the U.S. economy grew at an anemic rate of about 1.5 percent in the final quarter of the year and that it could slow to 0.5 percent or less in this first three months this year. A growing number expect a recession because of turmoil in the housing market and continuing tight credit conditions.

The chairman of ISM's manufacturing business survey committee, Norbert Ore, said he expected a couple months of either contraction or very slow growth before a rebound. He said supply executives reported that slower demand was more of a problem than excess inventory. The survey found weakness in new orders and production, which reversed in December after reporting growth in November.

"It's a little too soon to say whether this is a trend of continued contraction or whether it's a soft patch, then things pick up after that," Ore said.

Nomura chief economist David Resler said December results can sometimes be skewed by seasonal variation in orders, so January will be very closely watched to see whether the sector will keep falling.

"I think the troubling thing is not just that it was so low, and it is at a level that is typically breached only in recession, but that it's continuing in a downward trend," Resler said, noting that the index has been dropping since June.

Resler said the weakness in new orders could be a sign of further slowing going forward.

"Up until now, we've been able to console ourselves with the fact that the manufacturing sector has withstood the effects of the downdraft in housing," Resler said. "Now we can't be so confident."