Pullback in Manufacturing

The institute’s index of manufacturing conditions fell to a reading of 49.5 points last month, down from 51.7 in October.

Readings above 50 signal growth, while readings below indicate contraction. Manufacturing grew in October for only the second time since May. The institute is a trade group of purchasing managers.

A gauge of new orders dropped to its lowest level since August, a sign that production could slow in the coming months. Manufacturers also sharply reduced their stockpiles, indicating companies expected weaker demand.

“Today’s report suggests that the manufacturing sector is likely to remain a weak point in the recovery for a few months yet,” Jeremy Lawson, an economist at BNP Paribas, said in a note to clients.

The weak manufacturing survey overshadowed other positive economic reports. Greater home building in the United States bolstered construction spending in October by the most in five months. Manufacturing activity in China grew in November for the second straight month. And auto sales in the United States rebounded last month after Hurricane Sandy held sales back in October.

The institute said manufacturers are concerned about the sharp tax increases and government spending cuts that will take effect in January if Congress and the Obama administration fail to strike a budget deal before then.

These worries have led many companies to pull back this year on purchases of machinery and equipment, which signal investment plans. The decline could slow economic growth and hold back hiring in the October-December quarter.

A measure of hiring in the institute’s survey fell to 48.4 points, the lowest reading since September 2009.

Companies “are just backing off and not making any moves until things clear up a bit,” Bradley Holcomb, chairman of the Institute for Supply Management’s survey committee, said.

Consumers also appear nervous about higher taxes. Economists cited the prospect of higher tax rates in 2013 as a main reason consumer spending fell in October by the most since May.

When consumers cut back on spending, businesses typically reduce their pace of restocking. Both trends are expected to slow economic growth at the end of the year.

The economy grew from July through September at an annual rate of 2.7 percent, largely because of strong growth in inventories. Most economists predict growth is slowing in the current October-December quarter to a rate below 2 percent.

Hurricane Sandy had little impact on factory activity last month, according to the institute’s survey. The storm hit the East Coast on Oct. 29 and affected businesses in 24 states.

A gauge of production in the survey rose in November for the third straight month. That’s a sign that the hurricane didn’t force many factory shutdowns.

A slowdown in global growth has weighed on American manufacturers. New export orders slipped in November for the second straight month.

Surveys show consumers remain upbeat about the economy, despite the looming taxes and spending cuts. A measure of consumer confidence reached a five-year high in November.

If lawmakers and President Obama can work out a budget deal that averts the tax increases, most economists predict a good year for the economy.

Article source: http://www.nytimes.com/2012/12/04/business/economy/pullback-in-manufacturing.html?partner=rss&emc=rss