U.S. Economy: NAPM Index Drops to Lowest in 9 Years
from Bloomberg
By Siobhan Hughes
Washington, Jan. 2 (Bloomberg) -- U.S. manufacturing slumped in December to its lowest point since the end of the 1990-91 recession as orders and production declined, a survey of industry executives showed.
The National Association of Purchasing Management's factory index fell to 43.7 last month from 47.7 in November, the fifth straight decline and the 10th drop in 12 months. Readings below 50 signal a contraction and December's is the lowest since the index was 42.8 in April 1991.
Treasury securities soared and the dollar fell on expectations of slower growth and interest rate cuts from the Federal Reserve. ``You party hard, and the next morning you have a king-sized hangover,'' said Ken Mayland, president of ClearView Economics in Cleveland. The economy has ``done so well for so long, and so the necessary slowdown is going to appear painful.''
Manufacturers from computer chip makers to auto companies are paring production to reduce inventories, which swelled as the economy began to slow in the past half year following six interest- rate increases from the Fed. Demand for U.S. exports is also waning.
Virata Corp. and Conexant Systems Inc. last month cut profit forecasts on slower demand for semiconductors that provide Internet access. Virata, based in Santa Clara, California, said it reduced shipments after one of its largest customers, Westell Technologies Inc., cut the size of an order by 40 percent because of excess inventories. A ``steep drop'' in consumer demand for computers, fax machines and satellite TV set-top boxes caused a sales shortfall, said Newport Beach, California-based Conexant.
Auto Sales Fall
Sales at General Motors Corp. are forecast to have fallen about 14 percent in December from last year, according to the latest analyst estimates compiled by Bloomberg News. At Ford Motor Co. the decline was probably 11 percent and at DaimlerChrysler AG's Chrysler unit the drop was probably 12 percent. The drop in demand has forced carmakers to slash production, cut staff and eliminate some models in an attempt to reduce bloated stocks of unsold cars built up during record demand earlier last year.
The 10-year Treasury note had its biggest rally since October 1998, rising more than 1 1/2 points and pushing down its yield 20 basis points to 4.92 percent. That's the lowest since February 1999, and a sign investors expect the Fed to reduce borrowing costs.
Trading in fed funds futures for February shows investors are betting on a cut in the target interest rate on overnight loans between banks of as much as a half-percentage point this month to 6 percent. ``This will be strong incentive to cut rates,'' said Christopher Low, chief economist at First Tennessee Capital Markets in New York.
The euro rose more than half a cent against the dollar to almost 95 cents. And stocks declined. The Dow Jones Industrial Average fell 141 points, or 1.3 percent, to close at 10646.15. The Nasdaq Composite Index fell 179 points, or 7.2 percent, to close at 2291.86.
Manufacturing may stay in a slump in coming months. NAPM's new orders index fell to 42 in December from 48.4 in November. The inventories index fell to 39.8 from 42.2.
The production index, a gauge of current output, fell to 42.4 in December from 49.6. Meantime, the employment index fell to 42.8 from 46.
Inflation Outlook
The outlook for inflation worsened. An index of prices paid for raw materials rose to 61 in December from 56.6 in November. In their meeting Dec. 19, Fed policy-makers said ``while some inflation risks still persist, they are diminished by the more moderate pace of economic activity and by the absence of any indication that longer-term inflation expectations have increased.''
Economists say contraction in manufacturing doesn't necessarily signal a recession across the economy. A reading in the NAPM index above 42.4 generally indicates an expansion in the overall economy, according to the industry group. The last time the index was below that level was in March 1991, at the end of the last recession. Moreover, the NAPM index held below 50 for eight straight months at the end of 1998, during a time when the economy expanded at a 4.5 percent annual rate.
Analysts surveyed by Bloomberg News expect the U.S. to avoid recession in 2001, aided by a second-half spurt that is likely to boost growth for the year to 3 percent. Still, manufacturers are probably in for more months of decline, economists said.
Besides cutbacks at automakers, ``you've got New England injured by rising gas and energy prices,'' and the economic slowdown ``can't help but affect the new economy and sales of personal computers,'' said David Littman, chief economist at Comerica Bank in New York.
Manufacturers More Pessimistic
Last month, a NAPM survey found that U.S. manufacturers are pessimistic about their prospects for 2001. Two out of three manufacturers surveyed said they were concerned about business over the coming year, compared with less than half who were pessimistic the last time the industry group surveyed its members in May.
Cheap imports have kept raw materials prices from accelerating. While that has helped keep prices low, some manufacturers have suffered. In November, Weirton Steel Corp., the biggest maker of steel for food cans, said it would lay off about 2,400 workers because sales are being hurt by lower-priced imported steel.
NAPM's index measuring the backlog of orders fell to 36 from 42. The new export orders index rose to 49.9 from 48.7, the third month in a row that exports have been in decline.
Best Regards, J.T. |
