Manufacturing Sector Shrinks in November

The Associated Press
Friday, December 1, 2006; 6:18 PM

NEW YORK -- For the first time in almost four years, the nation's manufacturing sector has shrunk, and its fall is firing warning flares for the job market, economists said on Friday.

In a widely watched report, The Institute for Supply Management, a trade group based in Tempe, Ariz., said its manufacturing index came in at 49.5 in November, behind October's reading of 51.2. A reading below 50 indicates the sector is contracting.

Manufacturing had been growing since June 2003.

Industries such as wood, furniture, appliances, fabricated metal and transportation equipment all slipped last month, hit by a housing market slump and bloated automobile inventories.

The index was one of two worrisome economic reports Friday. The Commerce Department said construction activity in October plummeted by the largest amount since 2001, and home building fell for the seventh month in a row, the longest decline on record.

Both reports raised concerns that the economy may be in for a hard landing, and stocks and the dollar fell.

The ISM and construction spending reports could be more pieces of an economic puzzle that would guide the Federal Reserve to either keep interest rates level, or cut short-term rates sooner than economists were expecting. The Fed raised rates for the 17th consecutive time in June, but have held them at 5.25 percent since then.

Fed policymakers will also be considering next week's service sector report from ISM. While the service sector has outperformed the manufacturing sector in recent months, and grew more quickly than analysts expected in October, Wall Street is expecting to see slower growth in the November reading.

Zoltan Pozsar, an economist at Moody's, said the U.S. construction and auto industries may have pushed the ISM down, but at most, they make up a third of the industrial base.

"Orders and production will be soft going into next year," but will firm up once excess inventory is worked off, he predicted.

Pozsar also said the contraction will hit employment. He estimated 30,000 jobs were lost in housing-related industries in November and another 300,000 will be lost in the coming year, on top of 100,000 housing jobs lost since March.

"The job market seems a lot weaker than it was a year ago, which points to soft holiday shopping," Pozsar said, a trend he expects to intensify as the housing slump translates into people feeling less wealthy than when prices were high.

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