U.S. Economy: Manufacturing Shrinks, Spending Falls
By Bob Willis
Manufacturing in the U.S. shrank again last month and consumer spending recorded an unprecedented sixth monthly decline in December, offering no sign the economy has hit bottom.
The Institute for Supply Management’s factory index was 35.6 in January; readings less than 50 signal a contraction and the measure has been below that level since February 2008. The Commerce Department said personal spending fell 1 percent in December, and reported a third monthly drop in construction.
Factories are likely to cut back further as the slump in household purchases leaves companies with stockpiles of unsold goods. General Motors Corp. plans to slash production at 15 plants through June in an effort to work off the surplus inventory, and Chrysler LLC, Ford Motor Co. and Toyota Motor Corp. are also cutting back.
“The numbers are still terribly weak,” said James O’Sullivan, senior economist at UBS Securities LLC in Stamford, Connecticut. “Manufacturing is still contracting rapidly” while consumer spending is unlikely to recover “for a while,” he said.
Treasuries advanced and stocks gyrated between gains and losses. The Standard & Poor’s 500 Stock index closed down 0.1 percent at 825.43 in New York. Yields on benchmark 10-year notes fell to 2.72 percent from 2.84 percent at last week’s close.
A separate report from the Federal Reserve today showed a majority of U.S. banks made it tougher for consumers and businesses to get credit in the past three months even as lenders received infusions of taxpayer funds.
“About 65 percent of domestic banks reported having tightened lending standards on commercial and industrial loans to large and middle-market firms,” the Fed said in its quarterly Senior Loan Officer survey.
Senate lawmakers this week start deliberations on a fiscal stimulus bill in excess of $800 billion as President Barack Obama pushes Congress to enact his recovery plan to save jobs and boost spending. The House passed its version of the measure, which would provide tax cuts, spending on everything from schools to highway repairs and aid to state governments, last week.
Today’s construction report showed that the collapse in residential building may be spreading to commercial properties. Nonresidential construction slid 0.6 percent in December, the biggest drop since July. Total building fell 1.4 percent in the month, capping the worst year on record.
Savings Rate Increases
Consumers boosted savings in December as they sought to insulate themselves from the spreading U.S. recession. The rate rose to 3.6 percent, the highest level since May, when it climbed with the receipt of tax rebates from a previous fiscal- stimulus effort. Personal incomes slipped 0.2 percent in the month.
The economic downturn continues to keep inflation at bay, while raising some risk of deflation -- which would worsen the recession by making debts harder to pay and banks less likely to lend. The Federal Reserve’s preferred measure, the personal consumption expenditures price index excluding food and energy, was unchanged in December for a third month, Commerce said.
The median estimate of 70 economists surveyed by Bloomberg News was for an ISM reading of 32.5.
The ISM’s gauge of new orders rose to 33.2 from 23.1 the prior month, when it reached its lowest level since records began in 1948. ISM’s export orders gauge increased to 37.5 from 35.5.
The gauge of inventories fell to 37.5, the lowest since July 2001, from 39.6.
The group’s employment index was unchanged at 29.9 in January. The economy lost 2.6 million jobs last year, and economists forecast job losses to continue as the recession heads into its second year.
“Manufacturing has a long way to go toward recovery,” Norbert Ore, chairman of the ISM factory survey, said in a conference call. Companies are in a “very strong liquidation mode” regarding the inventories.
The world’s largest economy may contract at a 5.5 percent annual pace this quarter after declining at a 3.8 percent rate in the last three months of 2008, according to a forecast by economists at Morgan Stanley in New York. Last quarter’s drop was the biggest since 1982.
Consumer spending is likely to keep sliding through the first six months of this year after dropping in the last half of 2008, according to economists. Purchases have not contracted for four consecutive quarters since records began in 1947.
Retailers are sacking workers as sales slump. Macy’s Inc., the second largest U.S. department store company, today said it was cutting 7,000 jobs.
The ISM’s gauge of prices paid rose for the first time since June, to 29 from 18 in December, when it reached its lowest level since 1949 as oil and other commodities plunged. Economists had projected that the measure, which averaged 66 in 2008, would be unchanged at 18.
“The recession is deepening and the urgency of our economic crisis is growing,” Obama said Jan. 30 as he announced a task force to boost the middle class that will be led by Vice President Joe Biden.
Automakers have led the downturn in manufacturing as U.S. sales in December fell 36 percent from a year earlier. General Motors on Jan. 15 cut its estimate for 2009 U.S. industrywide auto sales to 10.5 million units, a 27-year low.
“Industry sales are at depression levels,” Michael Jackson, chief executive officer of AutoNation Inc., said in an interview with Bloomberg Television on Jan. 21. “It’s going to take extraordinary measures to get sales moving again.”
The factory slump has spread well beyond autos as demand from abroad also weakens. The U.S., Japan and the euro region are simultaneously in a recession for the first time in the postwar era. The International Monetary Fund last week projected global growth this year at 0.5 percent and said losses from the credit crisis will total $2.2 trillion.
After seeing “significant deceleration” in demand, Rockwell Automation Inc., the Milwaukee-based maker of factory automation equipment, today lowered its 2009 outlook. The ISM figure “still says recession,” said Rockwell’s Chief Executive Officer Keith Nosbusch in an interview.