U.S. Economy: Manufacturing Grows at Slower Pace (Update2)

By Courtney Schlisserman


Dec. 3 (Bloomberg) -- Manufacturing in the U.S. grew in November at the slowest pace in 10 months as the housing slump pushes the economy toward recession.

The Institute for Supply Management's factory index fell to 50.8, matching economists' forecasts, from 50.9 the previous month, the Tempe, Arizona-based group said today. Fifty is the dividing line between contraction and expansion.

The figures bear out warnings by Federal Reserve officials that the economy is cooling after a third-quarter surge. While manufacturers eliminated jobs last month, companies also reported increases in exports, production and orders.

``It's softer, but it's not a dire picture,'' said Julia Coronado, a senior economist at Barclays Capital Inc. in New York. ``Orders are holding up, and one of the things that's helping is overseas demand.''

Treasury notes remained higher after the report. The yield on the benchmark 10-year note fell 9 basis points to 3.85 percent at 4:43 p.m. A basis point is 0.01 percentage point.

President George W. Bush's administration is trying to hammer out a plan to help mitigate the housing slump.

Treasury Secretary Henry Paulson today said the government and banks will ``soon'' announce a plan to minimize foreclosures by getting agreement among banks, mortgage companies and securities-industry lobbyists to fix some subprime rates before they reset higher.

Easing Risks

While no ``silver bullet,'' a deal to rewrite a set of subprime loans would ``clearly'' ease the risks from the housing slump, Paulson said in an interview later.

The decline in the manufacturing reflected decreases in employment and inventories. The inventory index fell to 46.9 from 47.2. Figures less than 50 mean manufacturers are reducing stockpiles. The ISM's employment measure fell to 47.8, the lowest since September 2003, from 52 in October.

Increases in exports, production and orders prevented the decline from being even bigger. A gauge of export orders rose to 58.5, the highest since May, from 57.

The new orders index increased to 52.6 from 52.5, and the production index rose to 51.9 from 49.6.

Overseas demand helped Deere & Co., the world's largest maker of tractors and harvesters, boost profit in the fourth quarter. Demand in Brazil and Eastern Europe lifted overseas sales 32 percent, Deere said Nov. 21. That softened the blow from reduced revenue in the construction and forestry unit that reflected the housing slump.

Regional Surveys

Today's ISM report runs counter to regional surveys that showed manufacturing gained strength. Measures released previously by the National Association of Purchasing Management- Chicago and the Federal Reserve Bank of Philadelphia rose, while the New York Fed's gauge held near a three-year high.

Economists lowered fourth-quarter growth forecasts after reports last month showed inventories grew more last quarter than previously estimated, while consumer spending slowed in October and orders for durable good dropped.

A report showed auto sales held up last month. Purchases of cars and light trucks rose to a 16.2 million annual rate in November, from 16.1 million the prior month, according to Bloomberg News calculations.

Lehman Brothers Holdings Inc. projects the economy will expand at a 0.8 percent annual rate from October through December, down from a 4.9 percent pace in the previous three months. The data currently available suggest growth may be as weak as 0.2 percent, Morgan Stanley said.

Exports Help

``The closer they are tied to exports the better life is going to be right now,'' Norbert J. Ore, chairman of the Institute's manufacturing survey, said on a conference call. ``There are industries that are doing very, very well in this environment while others aren't doing so well.''

Orders for goods meant to last several years fell 0.4 percent in October, the Commerce Department said on Nov. 28. The gain in unfilled orders for capital goods excluding aircraft, a sign of business demand, was the slowest in eight months.

The ISM's measure of orders waiting to be filled slumped to 41.5, the lowest since March 2003, from 46.

``While new orders picked up slightly due to strong foreign demand, a dwindling backlog points to potentially softer production ahead,'' said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

Still, companies are probably trying to cut back on hiring to control costs. The economy may have created 75,000 jobs in November, less than half the 166,000 added the previous month, according to the median estimate of economists surveyed by Bloomberg News ahead of the Labor Department's Dec. 7 employment report.

``Uncertainty surrounding the outlook'' is ``even greater than usual,'' Fed Chairman Ben S. Bernanke said Nov. 30. That will require central bankers to be ``exceptionally alert and flexible,'' he said.

Federal funds futures show traders see a 100 percent chance of a reduction in the benchmark rate next month, with a 46 percent probability of a half-point move.