ISM Index of Factory Activity Contracted in November

The factory activity index of the ISM slipped to 47.7. Anything below 50 indicates contraction in factory activity. Further, the index of new orders also fell to 45.5 indicating that factory activity will continue to contract in the near term as well. Signs keep flashing the "R" word. Text in bold is my emphasis. From the WSJ:

A key measure of U.S. manufacturing contracted sharply in December, in a sign that recent strength in export-related businesses is being swamped by problems in housing and other parts of the domestic economy. (Finally, someone is admitting that the improving export market is tiny compared to the rest of the US economy, so it in fact does not matter that much.)

Until now, factories have shown resilience in the face of housing turmoil and high oil prices, in large part because exports of products like airplanes and mining machines helped offset slumping sales of domestically oriented items such as lawn mowers and wallboard. But the latest figures from the factory floor are heightening recession worries and confirm the view that the slowdown is spilling over to a growing list of goods-producing industries.

The Institute for Supply Management reported that its index of factory activity fell to 47.7 in December from 50.8 in November -- far lower than most economists were predicting and the lowest reading since April 2003. A reading below 50 indicates contraction. The index of new orders, a gauge for future business, fell even more sharply to 45.7.

"This is an early warning signal for manufacturing," said Norbert Ore, a Georgia-Pacific executive who directs the ISM survey. "I would not expect it to be a first half that features significantly strong growth." . . . . "The cautiousness on the part of businesses is almost a direct reflection of tighter credit conditions, and the pause that's led to in business confidence," said Bank of America economist Peter Kretzmer. "It's also a response to flattening profits as a result of higher costs all around."

A key question looms: Will businesses and consumers pull back further, spurring a broader decline in economic activity? The slump in housing-related sectors, from construction to mortgage finance, is already depressing overall employment. And the latest ISM report showed that export-related activity tumbled last month. That could mean exports are nearing the limit of their ability to offset steep declines in other sectors. . . . .

. . . . . Factories outside the U.S. face a slowdown that is less severe. J.P. Morgan, which publishes a monthly index for global manufacturing activity, announced yesterday that this measure fell 0.8 point to 51.4 -- the lowest reading in more than four years. "Manufacturing activity in Canada, the U.K., and the euro area also is being buffeted by tighter credit conditions, but the head winds are less intense" than in the U.S., said economist David Hensley.

In many ways, the picture for U.S. manufacturing is the inverse of the last big slowdown -- when manufacturers suffered a deeper, longer decline than the rest of the economy. In 2000, factories faced a strong dollar that choked off exports and a huge overhang of inventories and capacity.
This time, factories had been a bright spot. David Rosenberg, North American economist at Merrill Lynch, said the decline in the dollar has "supercharged the competitiveness" of manufacturers, prompting them to shift toward exports. At the same time, more foreign producers are setting up shop or expanding in the U.S., boosting direct foreign investment in the U.S. by more than 11% in the past year.

The question for manufacturers is whether the strength in foreign markets will be eclipsed by growing problems at home. Most of what is made by U.S. factories is consumed domestically, so exports can only go so far in taking up slack.