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Correction to This Article
This article misstated the title of analyst Scott Minerd and the name of his firm. He is the chief strategist at Guggenheim Partners.
Industrial Output Falling Sharply
U.S. Manufacturing Lowest Since 1980

By Howard Schneider and Annys Shin
Washington Post Staff Writers
Saturday, January 3, 2009

U.S. manufacturing activity decreased in December at its fastest pace in nearly 30 years, as businesses cut production and slashed product orders in response to the global recession, according to a closely watched survey.

The Institute for Supply Management's index of industrial production slipped from 36.2 percent in November to 32.4 percent in December, the lowest level since June 1980. A reading above 50 indicates that manufacturing activity is expanding, while a reading below 50 indicates a contraction.

None of the industries covered in the survey reported an expansion in their business, and the drop registered not just in the institute's index of production, but also in the volume of new orders and raw material costs.

"We're looking around for evidence not of things turning up but that things are not going down as rapidly, and at the moment, we can't find any evidence," said Nigel Gault, chief U.S. economist for Global Insight. "Things are falling very fast."

New orders fell 5.2 percentage points in December, to 22.7 percent -- the lowest reading since January 1948. The falloff means manufacturers will have to scale back production further, analysts said.

Meanwhile, prices paid for raw materials fell by 7.5 percentage points to 1949 levels. The drop reflected not only decreasing demand but also the steep drop in commodity prices that followed record highs earlier in the year, said Alan Levenson, chief economist with Baltimore-based investment firm T. Rowe Price.

Surveys of purchasing managers in Europe and in Asia released yesterday revealed similar declines and a general falloff in global trade.

A European survey showed a particularly sharp drop in industrial production began in the fall. As of October the economies of the eurozone showed an annualized production decline of 5.6 percent; by December the annualized figure had grown to 12 percent.

Manufacturing in China, which accounts for 43 percent of the economy, contracted for the fifth consecutive month, according to a survey of Chinese purchasing managers by brokerage firm CLSA, reflecting lower demand in the United States and in Europe. That led Eric Fishwick, head of economic research at CLSA in Hong Kong, to declare in a note that accompanied the report that China was "close to a technical recession."

None of Friday's reports bodes well for the first three months of 2009, analysts said.

"The numbers don't hold out a lot of hope for the first quarter," said Scott Minerd, chief investment strategist at Guggenheim Asset Management in Santa Monica. "The severity of the downturn can't be underestimated."

The expansion of the global economic crisis has prompted governments worldwide to move to rekindle growth. The incoming administration of President-elect Barack Obama hopes to quickly seek approval of a stimulus package, which could cost upwards of $1 trillion.

European Union governments have made a commitment to set aside an increased portion of their gross domestic product for infrastructure and other investments. Asian countries have taken similar steps. India yesterday announced it would further lower interest rates and ease bank lending requirements while also allowing local governments to spend up to $6 billion on public works projects.

Analysts said that whether the global economy bounces back in the second half of 2009 depends on the success of those government stimulus efforts. Skeptics of the U.S. stimulus have warned that a huge spending package might not boost growth, and that a ballooning deficit could ultimately be detrimental to the economy.

"The economy will on its own eventually turn up again, but if we're hoping for a recovery in 2009, then the private sector isn't going to do it on its own," Gault said.

T. Rowe's Levenson said consumer and investor confidence is so low that Congress and the incoming administration could do a lot to reassure everyone by having lawmakers take up the stimulus as soon as they return to Washington next week.

"If it came into focus that a fiscal package of this size were indeed gong to be passed, that could help market sentiment a great deal," he said.

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