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Manufacturing Falls to 26-Year Low

By Michael S. Rosenwald
Washington Post Staff Writer
Tuesday, November 4, 2008

Activity in the nation's manufacturing sector, beleaguered by tightfisted consumers and the global credit crisis, declined last month to the lowest level in more than two decades, offering economists more evidence that the country is entering a deep recession.

The Institute for Supply Management's index of conditions in the manufacturing sector is at its lowest level since the nation was in a recession in September 1982. Export orders have collapsed, and businesses appear to be struggling to sell inventories of items ranging from appliances to tobacco products, the report said.

"The bottom line is that this a very negative survey result and probably does spell a deep recession," said Abiel Reinhart, an economist at J.P. Morgan Chase.

The survey's index registered a score of 38.9. That figure, while probably obscure to most Americans, is a clear indication to economists that the manufacturing sector is shrinking markedly -- in fact, any figure below 50 indicates a contraction. The index was 43.5 in September.

Ian Shepherdson, chief U.S. economist with High Frequency Economics, which advises institutional investors, called the new figure "hideous" and added that "when you see a number like this, it's very alarming."

Reinhart said the manufacturing news was especially concerning given that less than a week ago the government reported that personal consumption had fallen at a 3.1 percent annual rate in the third quarter, the worst decline since 1980. "This new number, that number, they both suggest that the magnitude of the recession is going to be furious," he said.

The credit crisis appears to have stoked problems for manufacturers, making it difficult for them to operate. The institute said 53 percent of respondents said they or their suppliers had been negatively affected by turmoil in the financial markets. About 45 percent said the availability of credit had declined, and 41 percent said the cost of credit had gone up. Nearly one in four respondents said they have had difficulty starting or renewing a credit line, and more than three in four said they had curbed spending or hiring.

"The credit crisis really seems to have piled on to the problems," Reinhart said.

The problems appear to cut across the manufacturing sector.

The production index fell from 40.8 in September to 34.1 last month, the lowest level since 1980. The index of prices paid plunged from 53.5 to 37, dramatically down from 91.5 in June. New orders fell from 38.8 to 32.2. The customers' inventories index increased from 53.5 to 55, a sign that manufacturers think their customers have excess goods.

Large inventories generally suggest that customers are building up supply either because they expect demand to spike or because they are stuck with products that people don't want. In the case of this economy, it's the latter.

"If customers already have too much supply, they won't have demand for more goods," Reinhart said. "They may well have to sell products at a discount to get rid of them."

The manufacturing sector had been buoyed in recent months by strong worldwide demand, but the October report showed that the export index has fallen off the proverbial cliff, registering at an all-time low of 41 after clocking in at 52 in September. The only industries reporting growth in export orders were apparel and chemical products.

"We do have a clear global economic slowdown," said Joel Naroff, chief economist for TD Bank. He said he was not surprised the export number had dropped, "but I was a little surprised it happened this soon."

Analysts noted that, in at least one respect, things might not be as bad they seem for the manufacturing sector. The lingering effects of Hurricane Ike were among the external factors contributing to the decline in production. A respondent in the fabricated metal products business reported that the "Hurricane in Houston disrupted production for 10 days at our plant."

Shepherdson, the economist with High Frequency Economics, said there had been manufacturing index drops after other major hurricanes, including Andrew and Katrina.

"So there is a reasonable view that it could rebound a bit, but it has already fallen so far that the best it could signal is a mild recession," he said. "If it stays at these levels, a deep recession is unavoidable."

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