2 October 2002, 09:03  U.S. Economy: Manufacturing Contracted in September

/www.bloomberg.com/ By Carlos Torres and Monee Fields-White
Washington, Oct. 1 (Bloomberg) -- U.S. manufacturing contracted in September for the first time in eight months, an industry survey showed, as the economic recovery hobbled into the final quarter of 2002.
Business investment ``is very weak right now and I just don't see any signs of recovery,'' said Jeffrey Immelt, chief executive officer of General Electric Co., during a trip to Seoul earlier today. ``The U.S. economy is in a period of slow growth.''
The Institute for Supply Management's factory index dropped to 49.5, reflecting a slowdown in production and declining employment, from 50.5 in August. The index had been greater than 50, signaling growth, since February. Construction spending fell in August for a fourth straight month, the longest string of declines since April-July 2000, the Commerce Department said.
Intel Corp. and other companies that sell to businesses report few signs of the rise in demand that economists and Federal Reserve policy makers say is needed for the recovery to be sustained.
Economic growth is slower than Fed officials anticipated and if it doesn't pick up, the central bank may lower interest rates before yearend, two Fed policy makers suggested yesterday.
``Demand is weak, growth is below potential,'' Dallas Federal Reserve Bank President Robert McTeer told the National Association for Business Economics. ``We need faster growth.''
Auto Sales New York Federal Reserve Bank President William McDonough told an international bankers group that it's ``likely'' the economy ``will do just fine.'' Still, ``the American central bank has shown an ability that should that not be the case, we know what to do,'' he said. Policy makers next meet on Nov. 6.
Ford Motor Co. and DaimlerChrysler AG's Chrysler unit said their U.S. sales rose in September, aided by no-interest loans and discounts. Ford's sales increased 3.2 percent, while Chrysler's jumped 18 percent. Sales at General Motors Corp. fell 13 percent from a year earlier. Still, analysts estimate an annual selling rate of 16.3 million vehicles in September compared with an 18.7 million pace from the prior month.
U.S. stocks rose for the first day in three. The Dow Jones Industrial Average surged 347 points, or 4.6 percent, while the Standard & Poor's 500 Index rose 42 points, or 3.6 percent, as of 4:30 p.m. New York time.
Yesterday, the S&P 500 and Dow recorded their biggest quarterly declines since the 1987 market crash -- 18 percent. Stocks dropped during the last day of the third quarter after a survey showed manufacturing in the Chicago area contracted for the first time in eight months.
Foreshadowed
After the Chicago number, ``people were braced for a much more substantial decline'' in the figure released today, said Steven Ricchiuto, chief economist at ABN Amro Inc.
The Treasury's 4 3/8-percent note that matures in August 2012 fell more than a point, pushing up its yield 12 basis points to 3.72 percent. A basis point is 0.01 percentage point.
A decrease in business spending for new offices and factories pushed down the value of all construction spending by 0.4 percent in August, the Commerce Department said. The $159.2 billion value of construction of nonresidential buildings is the lowest in six years.
The economy is expected to grow at a 2.5 percent annual pace in the last three months of the year, down from an expected 3.5 percent pace in the quarter that ended yesterday, according to the median of 53 economists surveyed by Bloomberg News from Sept. 18 to Sept. 26.
For all of 2002, the economy will probably expand 2.5 percent, less than the 7 percent gains seen in the year following previous recessions.
Europe's Factories
Factories in Europe are struggling as well. European manufacturing contracted in September for the first time since January, according to the Purchasing Managers Index, released yesterday. The index fell to 48.9 from 50.8 in August. Manufacturing accounts for about a fifth of the European economy.
What's more, a dockworkers' strike at West Coast ports, in its fifth day, may slow production at U.S. factories.
``When we are three, four or five days into a disruption that creates a void'' that means manufacturers must ``decide whether to keep assembly lines open,'' said National Industrial Transportation League Vice President Peter Gatti, whose group lobbies in Washington on freight-shipping issues for General Motors and about 800 other U.S. companies.
The Tempe, Arizona-based ISM group surveys more than 400 companies in 20 industries, including clothing, printing, transportation, furniture and plastics. Manufacturing accounts for about one-sixth of the economy.
The production index, a gauge of work being performed, fell to 50.9 in September from 55.6. The employment index declined to 44.9 from 45.8.
Inventories
The index of inventories fell to 43.6 from 45.2, indicating inventories are being run down at a faster pace. The new orders index, which accounts for about a third of the total, rose to 50.9 from 49.7 in August.
The backlog of orders index fell to 44.5 from 45. The new export orders index dropped to 51.8 from 52.7. The index of prices paid for supplies rose to 62.5 from 61.5.
The information technology industry is experiencing the deepest recession in 30 years, said Craig Barrett, Intel's chief executive officer, during a Sept. 29 press conference in Dubai. Intel is the world's largest maker of computer chips.
Sales are unlikely to climb until well after economic growth in developed countries accelerates, Barrett said. ``I expect us to be at the tail end of the recovery when it happens,'' Barrett said. Only when consumer demand boosts company profits will those companies then invest in more high technology products, he said.

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