Manufacturing Officially Enters Deep Recession

Factory activity contracted sharply in October, falling to its lowest in 26 years as the financial crisis ravaged the world's largest economy and its trading partners around the globe, according to the report issued by Reuters.

The one bright spot in the report was that its main gauge of inflation, the prices paid measure, recorded its biggest one-month drop ever. This should let the Federal Reserve keep interest rates low to fight off what many fear will be a deep recession.

"Pretty grim. It means we're in a recession, it's as simple as that … a pretty solid manufacturing recession," said Robert Macintosh, chief economist at Eaton Vance Corp in Boston. "The question is, 'How long or deep is it going to be?'"

The Institute for Supply Management said its index of national factory activity fell to 38.9 in October from 43.5 in September. That was well below the 50 level separating contraction from expansion, and a reading below 40 is exceptionally weak. Economists had expected a reading of 41.5, according to the median of forecasts in a Reuters poll.

On Wall Street, stocks overcame initial selling after the ISM's data release at mid-morning to fluctuate between positive and negative territory throughout the session. Just after the 4 p.m. closing bell, the Dow Jones industrial average and the Standard & Poor's 500 Index were slightly lower and the Nasdaq Composite Index was modestly higher. The dollar managed to gain against the euro and yen.

Monday's data came a day before the U.S. presidential election and added to the load of evidence indicating that whoever wins will face a monumental task in getting the economy back on track. Other data showed U.S. construction spending fell in September, while data from around the globe showed few if any regions were immune to the pronounced economic deterioration.

The euro zone is already in a technical recession and growth will come to a virtual standstill next year, according to the European Commission, which called for coordinated European Union action to support growth. Euro-zone manufacturing sank in October below record low levels initially estimated and may have further to fall. British factory output contracted for a sixth consecutive month.

A measure of Chinese manufacturing showed factory output shrank sharply in October in the face of waning orders. The slowdown elsewhere in the world is bad news for the United States, where manufacturing had been kept afloat until August with the help of buoyant exports.

October's report showed index of new export orders fell to its lowest on record since the ISM began polling on this issue in January 1988. It was also deep in contractionary territory, ending 70 consecutive months of growth, the ISM said. In fact, the report was uniformly weak, and employment in the sector was dismal. The ISM's gauge of employment suffered its biggest one-month drop in 20 years and fell to its lowest since March 1991.

The data foreshadowed a grim outlook, with the index of new orders hitting its lowest level since 1980. "Usually when we see new orders drop significantly, it's not a one-month event," said Norbert Ore, chairman of the Institute for Supply Management's manufacturing business survey committee , in a conference call with reporters. "It will take awhile for the correction to take place."

The factory sector, like the rest of the economy, has been squeezed by a severe tightening of credit during the worsening of the financial crisis.

Most U.S. and foreign banks tightened lending standards to businesses and households over the last three months amid economic uncertainty and weakened capital positions, the Federal Reserve said on Monday.

Automakers have been hit hard. U.S. auto sales plunged near 25-year lows in October, led by a 45 percent drop at General Motors Corp, with no sign the industry's year-long slump had hit bottom and doubts persisting that all the major automakers can survive.

Reuters, Nov 3, 2008