U.S. factory activity tumbles; Europe mixed

By Emily Kaiser

WASHINGTON (Reuters) - U.S. manufacturing activity unexpectedly contracted in December while Europe's factory sector was mixed, according to reports on Wednesday that suggested economic anxiety was curbing demand.

The Global Purchasing Managers' index fell to 51.4 last month, the lowest in nearly 4-1/2 years, from 52.2 in November, according to data compiled by JPMorgan.

A slowdown in the United States, the world's biggest economy, clearly took its toll. The Institute for Supply Management's index of U.S. factory activity fell to 47.7 from 50.8 in November, well below economists' expectations and the weakest since April 2003. A reading below 50 indicates contraction in the sector.

New orders, a key measure of future demand, fell sharply to 45.7 last month, the lowest since October 2001, which was the tail end of the most recent U.S. recession.

Prices for U.S. government bonds surged while U.S. stock indexes tumbled after the report, which revived concerns that the U.S. economy may be limping toward a recession and led traders to increase bets on further interest rate cuts from the U.S. Federal Reserve.

"We are now in a no-growth situation for the manufacturing sector," said Norbert Ore, chairman of ISM's manufacturing business survey committee.

"If (the index) were below 50 for two consecutive quarters, that would equate to a manufacturing recession. If we were at 41.9 for six consecutive months that would be a recession for the overall economy."

FRANCE OVERTAKES GERMANY

In Europe, the picture was somewhat less gloomy as euro zone factory growth slowed marginally but more mildly than an initial estimate suggested. Increases in prices charged held firm, pointing to steady interest rates for many months.

The figures, based on final results from an NTC Economics poll of some 3,000 private sector companies in the euro zone, showed uneven growth rates across the big four countries.

France's expansion unexpectedly picked up from November and it overtook Germany as the fastest growing manufacturing economy among the big four economies. But Spanish factory purchasing activity contracted for the first time in 2-1/2 years.

The data showed minor revisions from the flash estimate published on December 17, with the Purchasing Managers' Index raised slightly to 52.6 from 52.5, which was also the consensus forecast. The PMI fell from November's 52.8.

Employment growth, production and input prices growth came in slightly higher and the prices charged index off slightly from the flash estimate.

A separate report on UK manufacturing also showed the growth rate eased, and more than economists had expected, with new orders expansion at its weakest since March 2006.

RBS said the euro zone PMI data were consistent with annual growth in official industrial production of under 2 percent.