Manufacturing Orders Fall to Lowest Level Since 1991

The nation’s manufacturing sector slumped last month to its lowest point since the early 1990s, increasing fears that what started as an economic slowdown could turn into an outright recession.

The National Assn. of Purchasing Management said Tuesday that U.S. manufacturers saw orders and output drop in December for the fifth consecutive month as everyone from auto companies to computer chip makers pared production.

Association officials said the group’s index of factory operations fell last month to 43.7 from 47.7 in November. Index readings below 50 indicate that manufacturing is contracting. Readings below 42.4 are thought to signal that the economy as a whole is headed for contraction.

December’s reading was the lowest since April 1991, when the nation was in the midst of its last recession.

“It’s another economic statistic that has ‘slowdown’ written all over it,” said Nicholas S. Perna, an independent economic forecaster. “It’s premature to declare a recession,” but things are headed in that direction, he said.

Mounting evidence that the economy is slowing further and faster than anyone had expected is pushing the Federal Reserve to cut interest rates to revive growth. But most analysts said Tuesday’s report will increase the pressure only modestly.

In part, that’s because the fate of manufacturing has diverged from that of the broader economy with some regularity recently, making it unlikely that the central bank will consider trouble in the nation’s factories sufficient reason to slash rates.

And it’s also because the new report contained evidence of the very thing that convinced the Fed to raise interest rates over the last two years to slow the economy--budding inflation. An index of prices paid by manufacturers for raw materials climbed to 61 in December from 56.6 in November.

Analysts said Fed policymakers will closely analyze the December employment report, to be released Friday, for signs of trouble. If the report shows a manufacturing job loss but the addition of workers elsewhere in the economy, the central bankers are likely to conclude the economy is just about where they want it--slowing but not stalling.

However, if the report shows an across-the-board job loss, the Fed is likely to cut rates, perhaps quickly.

“If the Friday numbers fall by 100,000 [jobs] that’s going to put . . . a lot of pressure on the Fed to cut,” said Perna.

The stock and bond markets reacted to Tuesday’s NAPM report and to a series of industry analysts’ profit warnings with a series of abrupt shifts suggesting that investors think a recession is all but underway.

The technology-heavy Nasdaq composite index lost another 7.2% of its value, and other stock indexes followed suit. Meanwhile, the U.S. Treasury bond market, which serves as a haven in troubled times, staged its biggest one-day price rally since the Asian and Russian financial crisis of October 1998.

The markets’ reaction signals a peculiar split among players and experts about the economy’s prospects. Although investors appeared convinced of a recession’s inevitability, economists are almost unanimous that growth will slow, but not actually stop.

“It’s the weirdest thing. [These two groups] are going in opposite directions,” said Richard Yamarone, senior economist with Argus Research Corp. in New York. “Somebody has got to be wrong, but I can’t figure out who.”

NAPM’s temperature-taking of manufacturing suggests that the goods-making sector will experience trouble for some time to come. The group’s index of new orders, which could keep factories busy in the coming months, dropped to 42 in December from 48.4 in November. Its inventory index fell to 39.8 from 42.2. Other NAPM measures showed that current production and factory employment also fell.

Manufacturers from the giant General Motors Corp. to tiny machine shops have announced layoffs in recent weeks. GM said it would cut its work force by 10,000 this year. Chip and computer makers that have posted huge output gains in the last five years have recently announced steep declines in orders.

The Fed raised interest rates six times between the fall of 1999 and last May in an effort to slow what it viewed as the economy’s unsustainable fast pace. After completing the rate hikes, the central bank continued to warn of over-fast growth and the danger of inflation until last month, when it reversed course and said that it now worried more about slowdown.

But the Fed refused to cut rates immediately, apparently fearing that such a move would set off another run-up in stock prices. The central bank’s policymaking body, the Federal Open Market Committee, is scheduled to meet Jan. 30 and 31.

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Economy 2001: Slowdown--or Recession?

A report Tuesday on manufacturing activity in December showed another dramatic fall, raising questions about how fast the economy is slowing.

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Manufacturing is in a dive...

National Assn. of Purchasing Management manufacturing sector index

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...and so are bond yields...

Treasury bond yields are sinking fast as investors bet the Federal Reserve will soon cut interest rates.

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...but the stock market is mixed.

Though tech stocks continue to plunge, many other stock sectors are rising, belying talk of recession.