Factory sector weakens sharply in October

WASHINGTON (MarketWatch Oct 3rd) -- The nation's manufacturing firms reported the worst level of output in 26 years, further evidence that the economy is slumping sharply, according to a closely followed survey of top executives released Monday.
The Institute for Supply Management index fell to 38.9% from 43.5% in September, below the 41.5% expected by economists surveyed by MarketWatch.
The result is the lowest reading since September 1982. The indexes for production and new orders fell to their lowest level in 28 years.
"When you hit levels that are similar to the early 1980s recessions, you cannot be very optimistic about the near term," said Joel Naroff, president of Naroff Economic Advisors.
Readings below 50% in the ISM diffusion index indicate that more firms are contracting than growing. The ISM tracks the breadth of growth across firms, asking purchasing managers if business is better or worse this month than last month.
The ISM had fallen sharply to 43.5% in September from 49.9% in August. As a result, the two-month decline of 11.0 points is the largest such drop since May 1980.
The nation's economy, as measured by gross domestic product, declined at a 0.3% pace in the third quarter. The ISM report suggested that the current quarter will be much weaker.
The key for manufacturing, as always, is the strength of final demand. Consumers have been cutting back spending amid the housing market recession, rising unemployment and the credit crunch.
The key issue now is just how much of the plunge in activity reflects the shock of the market meltdown and how much will be sustained, said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
The ISM is at clearly at recessionary levels, consistent with a 0.7% drop in GDP.
"There is no doubt that this is a recession," said Norbert Ore, head of the ISM's survey committee.

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