U.S. Economy: Manufacturing Shrinks as Orders Hit 60-Year Low

Jan. 2 (Bloomberg) — The decline in U.S. manufacturing deepened in December as demand for such products as cars, appliances and furniture reached the lowest level since at least 1948, signaling further cutbacks in factory jobs and production this year.

The Institute for Supply Management’s factory index fell to 32.4, below economists’ forecasts and the lowest level since 1980, from 36.2 the prior month. Readings less than 50 signal contraction. The group’s new-orders measure reached the lowest level on record and prices slid the most since 1949.

“Every component suggests that the weakness is going to carry over into 2009,” Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina, said in a Bloomberg Television interview. “There’s just not a whole lot of new business coming in,” and companies will have a “painful adjustment” as consumers shun spending.

Today’s figures underscore that, with private demand collapsing, manufacturers’ best hope for new business this year may be President-elect Barack Obama’s plans for an unprecedented stimulus package. Obama has pledged an investment program in roads, schools and the U.S. energy network akin to the 1950s- era interstate highway construction boom.

Stocks advanced on the first day of trading in 2009, following the biggest annual drop for the Standard & Poor’s 500 Index in 71 years, on expectations government stimulus efforts will curtail the recession. The S&P index rose 1.4 percent to 916.16 at 11:08 a.m. in New York. Benchmark 10-year Treasury yields rose to 2.25 percent from 2.22 percent late Dec. 31.

Global Slump

The report also showed the impact of recessions abroad: the Tempe, Arizona-based ISM’s measure of exports fell to the lowest level since that series began in 1988.

Separate figures today showed business at European factories contracted in December by the most on record. Manufacturing declined in China for a fifth month in December, for an eighth month in the U.K., for a seventh month in Australia and at the fastest pace in at least 14 years in Sweden.

The figures “confirm a sharp contraction in global investment, output and trade activity, consistent with the deepest global recession since at least the early 1980s,” said Lena Komileva, head of market economics in London at Tullet Prebon Plc.

Economists’ Forecasts

The ISM’s gauge, which covers about 12 percent of the economy, was projected to drop to 35.4, according to the median estimate of 57 economists surveyed by Bloomberg News. Forecasts ranged from 34 to 40 and the measure averaged 51.1 in 2007.

Clogged credit markets, the collapse in housing and mounting job losses have hurt demand for everything from furniture and appliances to automobiles, driving General Motors Corp. and Chrysler LLC to the brink of bankruptcy.

The ISM’s employment index decreased to 29.9 from 34.2 in November. The gauge of prices paid fell to 18, reflecting the drop in commodity costs. Economists had projected that the measure, which averaged 65 in 2007, would drop to 20.

Automakers have been among the hardest hit as November sales plunged to the lowest level in a quarter century, according to industry figures. President George W. Bush announced Dec. 19 that General Motors and Chrysler will get $13.4 billion in initial government loans to keep operating while they restructure operations to return to profitability.

Automakers Hit

The carmakers last month expanded their traditional holiday shutdowns to clear out unwanted stock. Chrysler idled all 30 of its assembly plants on Dec. 17 for at least a month, while GM announced output cuts Dec. 12 that affected 20 plants.

The closings will extend into this month. Ford Motor Co. said 9 of 15 North American factories would shut for the first week in January.

The U.S. Treasury this week issued broad guidelines for aid to the auto industry, opening the door to using taxpayer money to finance a wider array of companies, such as GM’s bankrupt former parts unit Delphi Corp.

The factory slump has spread well beyond autos as demand from abroad also weakens. Ingersoll-Rand Co., the maker of Thermo King and Hussmann refrigeration equipment, said last month that profit will fall short of fourth-quarter and full-year estimates after demand declined “sharply” in North America and Western Europe.

“Probably the U.S. and developed world are in recession,” General Electric Co. Chief Executive Officer Jeffrey Immelt said in his annual outlook address on Dec. 16. “The environment is still the toughest, for people of my generation, that we’ve ever seen.”

U.S. exports dropped in October for a third straight month, leading to an unexpected widening in the trade gap, figures from the Commerce Department last month showed. The drop indicated the economy was sinking even faster than previously estimated.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Last Updated: January 2, 2009 11:13 EST
By Shobhana Chandra

Source: Bloomberg

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