Analysts say factory data show economy is contracting

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

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 hit by 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 give the Federal Reserve 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 economywide, 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, Action Economics says.

Daniel Meckstroth, chief economist at the Manufacturers Alliance/MAPI, an industry trade group, said he does not expect a turnaround in manufacturing until mid-2009.

"The manufacturing industry has been in recession since October of 2007 and has seen moderate declines in production until recently," he said. "A broad-based and deep fall in the September report indicates that the energy shock, housing collapse and financial crisis has reached a point where the recession has spread to the general economy."