US manufacturing contracts to weakest in 3 years

03 Dec, 2012

 

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 US 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 US 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.

 

US 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 US 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 US 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 US businesses rose in October, as the central bank launched its latest round of monetary stimulus to encourage borrowing and spending.

 

US 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 US 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.

 

Copyright Reuters, 2012

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