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News > Economy
U.S. manufacturing slows
November 1, 2000: 12:45 p.m. ET

NAPM index declines to 48.3 in October; construction spending jumps
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - Activity at U.S. factories contracted for a third straight month in October while prices producers pay for their raw materials fell, a survey of purchasing managers showed Wednesday, fresh evidence that higher interest rates and slowing demand are taking their toll on manufacturing.

Separately, the government reported that construction spending rose 2.4 percent in September, a reading that came in above Wall Street forecasts.

graphicThe National Association of Purchasing Management said its index of manufacturing output slipped to 48.3 in October from 49.9 in September, more than a point below the 49.5 reading analysts polled by Briefing.com had expected. A reading below 50 points to shrinking manufacturing activity. The prices-paid index, which tallies what manufacturers pay for raw materials, slipped to 56.5 from 58.0.

The numbers offered more evidence that the economy is responding to six interest-rate increases by the Federal Reserve -- or part of it is, at least. NAPM business survey committee Chairman Norbert Ore cautioned that activity is expected to slow even more in the coming months as the strong U.S. dollar discourages overseas consumers from buying U.S. goods.

They also provided more ammunition to a growing contingent of Wall Street analysts and economists that the economy may be slowing enough to prompt Fed policy makers to begin contemplating cutting rates.

Definitive slowing

The NAPM report "provided strong support for the economic slowdown view, focused in basic manufacturing, and also clearly suggested the peak in core inflation is drawing near," said Sherry Cooper, chief economist with BMO Nesbitt Burns in Toronto. "This gives added weight to the possibility that the Fed will ease in the new year."

graphicThe Fed last raised rates in May, boosting its benchmark fed funds rate by a half-point to 6.5 percent in an effort to slow the economy and keep inflation contained. It has subsequently left rates unchanged, though cautioned at its last two meetings that the risks of accelerating inflation are prominent enough to keep its hand on the rate-increase button.

But that may change at its upcoming policy meeting in two week's time, according to Jim O'Sullivan, a senior economist with J.P. Morgan. "The weakness in manufacturing, coming on top of Monday's report showing a dip in consumer confidence, increases the likelihood that the Fed will switch to a neutral directive at the next meeting on November 15," he said.

The last time the NAPM's index showed contraction for a longer period of time was June 1998 through January 1999, when manufacturers were facing a recession brought about by the Asian economic crisis and a lack of demand for goods from overseas buyers.

Strong dollar a factor

"This report clearly shows there is weakness in the economy and the weakest point is in manufacturing," said Larry Horowitz, a senior economist with Primark Decision in Boston. "Certainly we are seeing a slowing and the strong U.S. dollar, particularly against the euro, is having some influence."

graphicIndeed, while rising interest rates are discouraging consumers from buying goods at home, the high level of the U.S. dollar against the euro is discouraging buying of U.S. products abroad. The euro dipped below the 83 U.S. cent mark to another all-time low earlier this week, making it more costly for overseas buyers to pay for U.S.-dollar priced goods.

The data "are consistent with a sharp adjustment in manufacturing activity in response to slowing demand," said Steven Wood, an economist with Banc of America Securities in San Francisco. "With inventories relatively high and new orders weak, factory activity is likely to remain weak."

Slowing demand for factory-made goods is evident in the NAPM's inventory-to-sales ratio, which measures how long manufactured goods sit on shelves before being shipping out. The inventory-to-sales ratio rose to 1.34 months' worth in October, the highest in 11 months.

Construction spending jumps

Separately, the Commerce Department reported Wednesday that spending on U.S. construction projects surged in September to their second-highest level on record as spending on nonresidential buildings such as factories and office buildings hit all-time highs.

graphicU.S. construction spending rose 2.4 percent to an annual rate of $819.3 billion after a revised 1.8 percent gain in August. September's gain was significantly higher than the 0.5 percent gain forecast by economists was the largest percentage gain since a 2.6 percent rise in November 1999.

That took construction spending to its second-highest rate ever. Construction spending hit its peak in March of this year when it stood at $829.5 billion. It steadily declined every month until July before posting gains in August and September.

Spending on private construction rose 2.1 percent to an annual rate of $630.8 billion, the second highest rate ever after March's peak. Spending on nonresidential buildings hit an all-time high, rising a strong 3.4 percent to an annual rate of $229.1 billion. graphic

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.