Washington, Sept. 3 (Bloomberg) -- U.S. manufacturing stalled in August, as orders declined for the first time in nine months and production slowed, indicating the recovery may be faltering.
The drop in new orders ``signals a warning,'' said Norbert Ore, head of the Institute for Supply Management's survey of manufacturers and director of purchasing at Georgia-Pacific Corp. ``We've lost a lot of momentum.''
The group's factory index held at 50.5 last month, less than expected and below the average 53.8 for the first seven months of this year. Stocks had their worst drop since September, the dollar fell and Treasury securities rose.
Sun Microsystems Inc. and other companies who sell mostly to businesses report little growth, while General Motors Corp. and other automakers are responding to an increase in car sales by boosting production. Economists and Federal Reserve policy makers say business investment is needed for the economy's recovery to be sustained.
``Certainly the signals on the investment side of the turnaround -- if you will, the expansion -- are still at best mixed,'' said General Motors Chief Executive Rick Wagoner in an interview. ``It's clearly coming back slower than we thought.''
The group's new orders index fell to 49.7, the first contraction since November 2001, from 50.4 in July. The orders index had risen as high as 65.3 in March, as companies responded to signs the economy was rebounding from a recession that began in March 2001. The production index slipped to 55.6 in August from 55.7.
Still Showing Growth
August was the seventh month the index has held above 50, the dividing line between expansion and contraction among manufacturers. The group says an index reading of 42.7 is consistent with the break between expansion and contraction in total gross domestic product.
That means the August reading ``is consistent with GDP growth of 2 1/2 to 3 percent,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York.
Before the report, the median of 48 forecasts in a Bloomberg News survey was for a reading of 51.8. Manufacturing accounts for about one-sixth of the economy and the Tempe, Arizona, group surveys more than 400 companies in 20 industries.
The Dow Jones Industrial Average fell 355 points, or 4.1 percent, to close at 8308.05. The Standard & Poor's index of 500 stocks declined 38 points, or 4.2 percent, to close at 878.02. For the S&P it was the biggest decline since Sept. 17, the day trading resumed after the terrorist attacks.
The dollar had its biggest decline in eight weeks against the euro, falling 1.3 percent to 99.72 cents per euro. The Treasury's 4 3/8 percent note maturing in August 2012 rose 1 3/8 points, pushing down its yield 17 basis points to 3.97 percent. A basis point is 0.01 percentage point.
Inventories, Prices
The group's index of inventories rose to 45.2 from 41.8, indicating stockpiles of unsold goods are being run down at a slower pace. The employment index rose to 45.8 from 45, indicating manufacturers still aren't hiring after eliminating jobs every month for two years.
A gauge of prices paid by manufacturers for materials and supplies fell to 61.5 last month from 68.3 last month.
Production is expanding because of the strength of consumer spending and because inventories still remain low relative to sales. Personal spending rose 1 percent in July, the Commerce Department said last week. A separate report showed that the value of business inventories was $1.119 trillion in June, down 4.7 percent from a year earlier.
Auto Production
Cars sold in July at an 18.1 million-vehicle annual rate, the fastest pace of the year, as automakers lured shoppers with zero- interest loans. Sales in August may have been about 8.5 percent higher than a year ago, holding at a 17.8 million pace, according to the average of eight forecasts in a Bloomberg News survey.
Consumer spending ``needs to keep moving forward,'' said Michael Moskow, president of the Federal Reserve Bank of Chicago, said in a speech last month. While business spending on equipment is no longer declining, it ``clearly has a long way to go before the level of activity returns to where it was prior to the recession.''
The effect is evident in production schedules. General Motors, the world's biggest automaker, on Aug. 1 raised its North American production estimate for the third quarter to 1.262 million vehicles, up 1.4 percent from a month earlier.
Appliances
Shipments of major home appliances in the U.S. were 19 percent higher in July than a year earlier, boosted by deliveries of gas ranges, microwave ovens and air conditioners, according to the Association of Home Appliance Manufacturers. Appliances are in demand because of the strength of the housing market. Home sales may set a record this year with mortgage rates at their lowest in at least three decades, according to a National Association of Realtors forecast.
Business investment remains lackluster, which has weighed on computer and semiconductor makers. ``It seems to be mainly a consumer-led recovery,'' said Intel Corp. Chief Executive Craig Barrett at a press conference in India on Friday. ``There is still a huge over-investment in the communications sector,'' he said. ``That capacity has to be worked off before the computer sector starts to rebound.''
Sun Microsystems, whose server computers run corporate networks and Web sites, on Thursday said that its sales for the quarter that ends next month will be little changed from $2.86 billion a year ago, at the low end of forecasts made last month.
``We have not seen any improvement'' in corporate spending, Chief Financial Officer Steve McGowan said on a conference call. ``Some would say it actually may be worsening.''
That poses a threat to the economy, which grew at a 1.1 percent annual rate in the second quarter. Economists in the latest Blue Chip Economic Indicators survey project a 2.6 percent growth rate this quarter and a 3 percent rate in the final three months of the year. That would put growth for the year at less than half the average 7 percent after most recessions.