US Factory Activity Falls, ISM Mfg Index At 26-Year Low

NEW YORK -- U.S. factories saw yet another drop in activity in October, as problems in the financial sector continued to spill over into the manufacturing arena.

The Institute for Supply Management, a private research group, reported Monday that its index of manufacturing activity failed to grow for a third consecutive month, moving to 38.9 in October, from the contractionary 43.5 in September and the 49.9 seen in August. The October reading was the lowest since September 1982, when it registered 38.8.

Readings above 50 point to expansion in activity. Economists polled in a survey by Dow Jones Newswires had expected the October index to hit 41.5.

Details of the report showed weakness across the board, with the new orders and employment sub-indices also falling to levels last seen in the 1980s and 1990s, respectively.

The survey "indicates a significantly faster rate of decline in manufacturing when comparing October to September," said Norbert Ore, who directs the ISM manufacturing survey.

"It appears that manufacturing is experiencing significant demand destruction as a result of recent events," he added, with members indicating challenges associated with the financial crisis, interruptions from the Gulf hurricane, and the lagging impact from higher oil prices.

The data indicate that the manufacturing sector "certainly is in a recession, Ore said.

The survey's softening is in-line with other recent key economic indicators, which have wilted as well as the turmoil in financial markets has continued to make its mark on the broader economy. Consumer confidence recently plunged to an all-time low and consumer spending has fallen. Labor market conditions are also still bleak. Jobless claims figures remain elevated, and October nonfarm payrolls are expected to fall for a ninth month in a row when the data are released Friday. Economists are expecting a whopping 200,000 drop in jobs, which would be the largest loss of jobs since 2003.

The ISM report showed that the October new orders index hit its lowest reading since June 1980 when the index was at 24.2.In October it fell to 32.2, down from 38.8 in September and from 48.3 in August. The production index was at 34.1 from 40.8 in September and 52.1 in August.

Hiring fell as well, with the employment index at 34.6 in October from 41.8 in September and 49.7 in August. The October reading was the lowest reading since March 1991 when the index hit 33.6%. Inventories ticked up, with that reading at 44.3 versus September's 43.4.

The new export orders index fell to 41 in October, a decrease of 11 percentage points when compared to September's index of 52. This month's reading of 41 ends 70 consecutive months of growth in the index.

"Everything was affected," Ore said, a development he attributes "to the financial crisis really catching up with the manufacturing sector and consumer demand being an issue."

Ore also noted that the index has historically been sensitive to the exchange rate of the dollar, and that in part explains the drop in exports. Exports plunged on both the recent rebound of the dollar and the financial crisis, he said.

The month's ISM report also showed that prices rose at a much slower rate, with that index falling to the lowest level since December 2001. In the report, the private research group said that the price index plunged to 37 in October from 53.5 in September. Export orders also contracted for the first time following 70 months of growth.

In a special question, respondents were asked in October about the possible effects from the recent turmoil in financial markets. Nearly 53% of respondents said that they or their suppliers have been impacted by the recent market turmoil.

Of those affected, 44.6% said they have seen a decrease in the availability of credit, 40.8% said they have seen an increase in the cost of credit, 24.7% have experienced difficulty in initiating or renewing a bank credit line, and 78.6% have reduced spending and/or hiring.

On the overall bleak report, Ore said that it would be unlikely for the October drop to be a "one-month event, and to correct itself and go back up. I'd expect some of that sensitivity to continue," he said.