Amid housing slide, U.S. manufacturing sector contracts in November for first time since 2003

Friday, December 1st 2006, 12:25 pm

By: News On 6

NEW YORK (AP) _ The slump in housing and autos took a bite out of the nation's manufacturing sector, which in November contracted for the first time in more than three years, a trade group said Friday.

Industries such as wood, furniture, appliances, fabricated metal and transportation equipment all were flat or slipped last month, according to the Institute for Supply Management, based in Tempe, Ariz.

In a report that points to a worrisome trend for the economy and for jobs, ISM said its manufacturing index registered 49.5 in November, behind October's reading of 51.2. The last time the sector contracted was in April 2003. A reading below 50 indicates contraction.

The sector had been growing for 41 consecutive months.

November's index came in below the average analyst expectation for a reading of 52.

The index was one of two troublesome 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.

``This of course does not mean the economy is going to go into a recession,'' said Zoltan Pozsar, an economist at Moody's Economy.com. ``Probably two-thirds of why the ISM is below 50 are in building material construction and automotive. They are very weak, but they only make up probably 20 percent or one-third of the industrial base.''

Inventory buildups of automobiles and other products dragged manufacturing down last month, Pozsar said.

``Orders and production will be soft going into next year, probably through the first quarter of next year. Once these inventories are worked off, manufacturing is going to firm again,'' he said.

Contraction in housing and other sectors will have a very real impact on employment, the economist added. 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 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.

The ISM report said that employment in the manufacturing sector shrank in November, with a 49.2 reading compared with 50.8 in October.

The new orders index fell to 48.7 in November, compared with 52.1 in October. The production index also contracted, dropping to 48.5 from 51.9 last month.

The prices paid index rose to 53.5, after falling to 47 in October. The prices paid index reflects raw materials costs to manufacturers. Prices had been falling until recently, after oil prices fell about 20 percent since the summer but have rebounded in the past few weeks.

Pressure from raw materials prices is nothing new, said Mary Brebard, vice president of investor relations at auto parts supplier BorgWarner Inc.

BorgWarner's operations are protected to some extent from the downturn in the U.S. by significant overseas operations, but in September the company still lowered its outlook and said it would lay off 850 workers due to cuts in North American auto production.

The Commerce Department reported that building activity dropped 1 percent in October after a smaller 0.8 percent drop in September. It was the biggest decline since September 2001, when the terrorist attacks compounded a recession.

Residential construction fell 1.9 percent, the biggest decline since July. Non-residential construction dropped for the second straight month.

Stock prices fell in midday trading Friday. The Dow Jones industrials fell 37.74, or 0.31 percent, to 12,184.19, while the Nasdaq composite index dropped 15.20, or 0.63 percent, to 2,416.57. The broader Standard & Poor's 500 index sank 1.47, or 0.1 percent, to 1,399.16.

The dollar also fell against most major currencies following the news. The euro hit a 20-month high against the dollar, while the British pound reached its highest level since 1992.

Bond prices rose after the two reports, pushing the yield on the 10-year Treasury note down to 4.42 percent.

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

The government 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.

While the overall manufacturing sector contracted, eight industries reported growth in November. They included apparel and leather; plastics and rubber; primary metals; food, beverage and tobacco; computer and electronic products; printing; chemical products and the miscellaneous category.