Overtime hours point to manufacturing recession

By Nick Zieminski

NEW YORK (Reuters) - A drop in factory overtime hours to the lowest level since 2002 does not bode well for the manufacturing sector and has led many to expect widespread job cuts and a recession-plagued economy.

A decline in overtime, indicated by both government and private-sector data this month, coupled with falling factory use rates, means employers are taking more aggressive steps to cut production and rein in costs.

It is also a leading indicator of broader demand for workers, since employers initially make cuts where they have the most flexibility, by reducing variable rather than fixed costs. With unemployment at a two-year high of 5.0 percent, current trends may mean a higher jobless rate in 2008.

"Manufacturers invest a lot of money in worker training, so the first stage if you're going to react to slower demand is to cut back on the hours worked," said David Heuther, chief economist of the National Association of Manufacturers (NAM) in Washington, D.C.

U.S. manufacturing workers put in an average of 3.9 hours a week of overtime last month, down about 5 percent from 4.1 hours in the previous month, and 4.2 hours in the first two quarters of the year, according to government data.

By comparison, they averaged 4.6 hours a week in the fourth quarter of 2005 when the economy was in better shape, and 3.8 hours in the fourth quarter of 2001, near the end of the most recent U.S. recession.

For the total labor market, overtime hours were down 10 percent in 2007 from the year before, according to staffing services company Manpower Inc (MAN.N: Quote, Profile, Research, Stock Buzz).

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