Jan. 2 (Bloomberg) -- Manufacturing in the U.S. shrank in December at the fastest pace in almost three decades as the recession deepened and spread overseas.
The Institute for Supply Management’s factory index fell to 32.4, below forecasts and the lowest level since 1980, from 36.2 the prior month, the Tempe, Arizona-based private group said today. Readings less than 50 signal contraction. The group’s price measure fell to the lowest level in almost six decades.
Clogged credit markets, the collapse in housing and mounting job losses have hurt demand for everything from furniture and appliances to automobiles, driving General Motors Corp. and Chrysler LLC to the brink of bankruptcy. The slump will extend into 2009 as downturns in Europe and Japan also depress exports.
“It’s a breathtaking plunge in manufacturing,” said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, whose estimate tied for lowest among economists surveyed. “The exports numbers are reflecting recessions abroad. The world is very much coupled.”
The group’s gauge, which covers about 12 percent of the economy, was projected to drop to 35.4, according to the median estimate of 57 economists surveyed by Bloomberg News. Forecasts ranged from 34 to 40 and the measure averaged 51.1 in 2007.
Stimulus Plan
The manufacturing slump underscores why President-elect Barack Obama, who takes office Jan. 20, has said his first priority will be to pass an economic stimulus plan that will invest in public works and create or save 3 million jobs. The package may be worth as much as $850 billion.
Stocks advanced on the first day of trading in 2009, following the biggest annual drop for the Standard & Poor’s 500 Index in 71 years, on expectations government stimulus efforts will curtail the recession. The S&P index rose 1.1 percent to 913.47 at 10:40 a.m. in New York. Treasury securities were little changed.
Manufacturing deteriorated around the world in December, signaling a worsening global recession, other reports today showed. The euro-area’s gauge fell to a record low, while industry in China contracted for a fifth month. Indicators for the U.K., Sweden, Hong Kong and Australia also showed factories in decline.
Such data “confirm a sharp contraction in global investment, output and trade activity, consistent with the deepest global recession since at least the early 1980s,” said Lena Komileva, head of market economics in London at Tullet Prebon Plc.
Orders Collapse
The ISM’s gauge of new orders dropped to the lowest level since records began in 1948, while export demand was also the weakest since those records started in 1988. The group’s employment index decreased to 29.9 from 34.2 in November.
The gauge of prices paid fell to 18, the lowest level since 1949, reflecting the drop in commodity costs. Economists had projected that the measure, which averaged 65 in 2007, would drop to 20.
All 18 industries tracked by the group contracted last month, the first time that’s happened since Norbert Ore took over as chairman of the ISM’s factory report in 1996.
“We’ve seen a tremendous amount of demand destruction,” Ore said during a conference call with reporters. “There is a significant inventory correction taking place,” he said, and added he couldn’t predict when manufacturing would recover.
Auto Decline
Automakers have been among the hardest hit as November sales plunged to the lowest level in a quarter century, according to industry figures. President George W. Bush announced Dec. 19 that General Motors and Chrysler will get $13.4 billion in initial government loans to keep operating while they restructure operations to return to profitability.
The carmakers last month expanded their traditional holiday shutdowns to clear out unwanted stock. Chrysler idled all 30 of its assembly plants on Dec. 17 for at least a month, while GM announced output cuts Dec. 12 that affected 20 plants.
The closings will extend into this month. Ford Motor Co. said 9 of 15 North American factories would shut for the first week in January.
The U.S. Treasury this week issued broad guidelines for aid to the auto industry, opening the door to using taxpayer money to finance a wider array of companies, such as GM’s bankrupt former parts unit Delphi Corp.
Spreading Slump
The factory slump has spread well beyond autos as demand from abroad also weakens. Ingersoll-Rand Co., the maker of Thermo King and Hussmann refrigeration equipment, said last month that profit will fall short of fourth-quarter and full-year estimates after demand declined “sharply” in North America and Western Europe.
“Probably the U.S. and developed world are in recession,” General Electric Co. Chief Executive Officer Jeffrey Immelt said in his annual outlook address on Dec. 16. “The environment is still the toughest, for people of my generation, that we’ve ever seen.”
U.S. exports dropped in October for a third straight month, leading to an unexpected widening in the trade gap, figures from the Commerce Department last month showed. The drop indicated the economy was sinking even faster than previously estimated.
To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net
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