Manufacturing contracts to weakest level since April 2003

Posted Jan 2nd 2008 12:44PM by Joseph Lazzaro
Filed under: Bad News, Economic Data, Federal Reserve

The nation's factory sector contacted in December 2007 to its weakest level since April 2003, the Institute of Supply Management announced Wednesday. The ISM index fell to 47.8% in December 2007 from 50.8% in November 2007. Readings below 50% indicate a contracting industrial sector. Analysts had expected a December 2007 ISM reading of 50.9%.

In all, only seven of 18 industrial segments expanded. Moreover, economic activity in the manufacturing sector failed to grow in December 2007 after 10 consecutive months of expansion, while the overall economy grew for the 74th consecutive month, the ISM announced.

Disappointing statistic

Economist Steve Affinito told BloggingStocks Wednesday that the ISM statistic will place more pressure on the U.S. Federal Reserve to continue to cut short-term interest rates.

"It's a disappointing statistic, no question. We were looking for something slightly north of [above] 50% and a reading below 50%, that has to concern the Fed. It's just one month but it indicates that manufacturing is contracting, and at minimum is likely to grow to slowly," Affinito said. "The Fed will have to cut interest rates at least two more times to help prevent an economic stall. The December ISM stat is not a number the Fed hawks can ignore."

New orders, production fall

The ISM's new-orders index fell to 45.7% in December 2007 from 52.6% in November 2007, while the production index fell to 47.3% from 51.9% during the same period.

Affinito said the overall index decline, combined with the new orders drop, reinforces the thesis that the manufacturing component of the U.S. economy is not healthy.

"If you have a dichotomy, one where the overall ISM stat declines, but where new orders show strength, the Fed can analyze it and argue, `Well manufacturing isn't totally contracting because demand is picking up, as measured by new orders,' " Affinito said. "But both stats declined, which says the factory sector is not doing well now and that the short-term outlook doesn't look better, either. That points to softening demand and a contracting economy, which the Fed most certainly does not want."

Tags: Fed, GDP, industry, Institute of Supply Management, inthenews, ISM, manufacturing sector, ManufacturingSector, recession, U.S. economy, U.S. Federal Reserve