Manufacturing contracts to weakest in three years

NEW YORK Mon Dec 3, 2012 12:51pm EST

Ford Assembly workers install a battery onto the chassis of a Ford Focus Electric vehicle at the Michigan Assembly Plant in Wayne, Michigan November 7, 2012. REUTERS/Rebecca Cook

Ford Assembly workers install a battery onto the chassis of a Ford Focus Electric vehicle at the Michigan Assembly Plant in Wayne, Michigan November 7, 2012.

Credit: Reuters/Rebecca Cook

NEW YORK (Reuters) - Manufacturing unexpectedly contracted in November to its lowest level in more than three years, as companies worried about whether lawmakers in Washington could reach a budget deal in time avert a crisis that many fear could lead to a recession.

The Institute for Supply Management (ISM) said on Monday that its index of national factory activity fell to 49.5 in November from 51.7 the month before. The reading was shy of expectations of 51.3, according to a Reuters poll of economists.

The figure was the softest since July 2009 when the U.S. economy was struggling in the aftermath of the financial crisis. Economists said the November slide may have been aggravated by superstorm Sandy, which devastated the U.S. east coast in late October, as well as uncertainty over budget negotiations in Washington.

The return to contraction - when the index falls below 50 - surprised many economists and investors who had hoped that two straight months of growth meant the economy had gotten over the weakness seen during the summer months.

Still, economists were divided on the impact of one-off events such as Sandy and the fiscal cliff negotiations. Some said that although the sector expanded over the previous two months, the trend was anemic growth, akin to stagnation.

"Since May the index has been very close to 50 and I think what we are seeing is that manufacturing has stalled and has yet to recover," said Christopher Low, chief economist at FTN Financial in New York.

U.S. stocks lost ground after an earlier rise on Chinese reports that showed manufacturing in the world's second-largest economy picked up during the month. At midday, the S&P 500 and Dow Jones industrial average were about flat.

Investors are wary about negotiations in Washington aimed at averting the so-called "fiscal cliff", a series of tax hikes and spending cuts that economists say could push the economy into a recession.

Recent data also showed U.S. consumer sentiment weakened in November amid growing uncertainty over federal tax and spending programs next year.

"Overall, today's report suggests that the manufacturing sector is likely to remain a weak point in the recovery for a few months yet," said Jeremy Lawson, an economist at BNP Paribas in a research note.

But the ISM survey was at odds with a separate manufacturing survey also released on Monday. Financial information firm Markit said rising demand from domestic and foreign customers helped U.S. manufacturing grow in November at its quickest pace in six months, though hiring remained sluggish.

ISM's survey, which focuses more on large companies, also seemed to contradict a survey of smaller firms published on Monday, though this survey was conducted a month earlier.

The Thomson Reuters/PayNet Small Business Lending Index showed borrowing by small U.S. businesses rose in October, as the central bank launched its latest round of monetary stimulus to encourage borrowing and spending.

U.S. October construction spending was a bright spot as the housing sector recovery appeared to be gaining traction. Spending rose by the most in five months, with stronger spending on homes outpacing tepid gains in business and government projects.

The mixed evidence means some economists are taking a more optimistic view.

"As long as Congress reaches a deal to avoid the cliff, then activity should bounce back next year," said economists at Captial Economics in a research note. "Any hit from Sandy may be reversed before then."

Several automakers on Monday reported strong U.S. new-car sales for November as the industry rebounded from a weak October while also benefiting from pent-up demand.

Monday's reports marked the start of a relatively busy week for economic data releases that comes to a head on Friday with the closely watched monthly payrolls report for November. Economists in a Reuters poll expect 93,000 jobs were created during the month, down from 171,000 the month before.

(Additional reporting by Chris Reese; Editing by David Gregorio)

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Comments (28)
Crash866 wrote:
How about that…anyone and I mean anyone surprised by this …more stimulus please…how do you think the next 4 will go…Cool Hand Luke…”this is the way he wants it….well he gets it”..tick tock…you voted for it…

Dec 03, 2012 10:59am EST  --  Report as abuse
Crash866 wrote:
“The other, which is a little more realistic is that since May the index has been very close to 50 and I think what we are seeing is that manufacturing has stalled and has yet to recover.”

4 years has yet to recover but we get 4 more years…good choice folks..

Dec 03, 2012 11:02am EST  --  Report as abuse
Stickystones wrote:
I’m just totally shocked by this news! You mean manufacturing has stalled and really never recovered from the last recession, geez you’d thought things were just humming along with the re-election of the President. As the Warden said to Cool Hand Luke ‘what we have here, is a failure to communicate’. But it is by design, not by accident.

Dec 03, 2012 11:17am EST  --  Report as abuse
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