Manufacturing index shrinks to lowest level since 2001

WASHINGTON -- Manufacturing activity plummeted in September at the fastest pace in more than two decades to its lowest level since immediately following the Sept. 11 terrorist attacks, a report out Wednesday said.

A number of economists said the data, which showed sharp declines in manufacturing orders, production, employment and exports, confirmed the economy was contracting.

"If anyone doubted the U.S. economy was in recession, this report pretty much seals the deal," PNC Financial Services chief economist Stuart Hoffman says.

The Institute for Supply Management said its index of activity in the factory sector was 43.5 in September, down from 49.9 in August and the lowest since October 2001. It was the biggest one-month point drop in the index since January 1984.

Index numbers above 50 suggest an expansion in factory activity; those below point to a contraction. The manufacturing index has been below 50 in six of the first nine months of 2008.

The survey was conducted at the end of September, so the report reflects the current financial turmoil as well as recent hurricanes, says Norbert Ore, chairman of the ISM manufacturing committee.

"Spending, whether it is business, consumer or government, is falling significantly. It's no surprise that would be reflected in manufacturing," Ore says, noting he does not expect the numbers to look better next month.

The details were decidedly negative:

•Orders. The index of new orders was 38.8 in September, down from 48.3 and the lowest since January 1991.

•Production. The production index was 40.8 last month, down from 52.1 and the lowest since February 2001.

•Employment. The employment index was 41.8, down from 49.7 and the lowest since April 2003.

•Exports. The export index was 52, down from 57 and the lowest since July 2006.

There was one positive in the report. The index of prices paid by manufacturers for raw materials posted its biggest one-month decline in the history of the survey, which was started in 1931. That will help manufacturers who have been hit with record-high energy costs and rising prices for other goods this year as they try to maintain profitability in a slowing economy.

Easing price pressures also gives Federal Reserve policymakers more leeway to cut interest rates to try to reduce borrowing costs to help boost the economy. The Fed typically raises rates to stem inflation and cuts them to address economic weakness.

The Fed's target for short-term interest rates, which influences borrowing costs economy wide, is at 2%, the lowest since December 2004. Investors in a market in which participants bet on future Fed moves are pricing in at least one more rate cut before the end of the year, according to Action Economics.

The manufacturing report overshadowed a Commerce Department report that said construction activity was flat in August, better than the 0.5% fall economists expected. The big surprise was a 0.3% rise in residential activity, the first increase in the housing area since March 2007.

Still, the government revised July activity to show a much bigger drop of 1.4%, compared to the 0.6% decline initially reported.