Manufacturing unexpectedly drops on U.S. fiscal concern

Manufacturing unexpectedly contracted in November for the fourth month in the last six as factory managers grew more concerned about the potential economic toll stemming from the so-called fiscal cliff.

The Institute for Supply Management’s factory index fell to 49.5, the lowest since July 2009, from 51.7 in October. The median forecast in a Bloomberg survey called for 51.4. Fifty marks the dividing line between expansion and contraction. Construction spending in October jumped by the most in five months, another report showed.

Weaker overseas demand, less investment in equipment and the possibility of automatic tax increases and government budget cuts in 2013 are hurdles for companies making everything from apparel to machinery. With six months of stagnation in manufacturing, construction gains, reflecting a rebound in housing, are helping pick up some of the slack for the world’s largest economy.

“We could be doing a lot better than we are doing if we had a coherent fiscal policy,” said Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York, one of two forecasters to project a contraction. “We have a recovery in housing that’s been underway for a year and a half now. More recently, it’s been picking up steam. This will help offset what’s going on in other places.”

Bradley Holcomb, chairman of the ISM survey, said that more manufacturers said concerns about the fiscal cliff, rather than Sandy, were behind the slowdown.

“We’re picking up scarcely little about the storm, and it wasn’t talked about that much, certainly relative to the fiscal cliff,” Holcomb said. “Their concern is about taxes and what that will mean for business overall. For the lack of insight, they’re just slowing down and keeping a foot on the brake. That shows up in employment, shows up in inventories.”

Other reports today (Dec. 3) showed euro-area manufacturing kept contracting in November while factory output rose in China and Russia, underscoring the divergence of the global economic recovery.

Manufacturing in the 17-nation euro area shrank for a 16th month, with a gauge rising to 46.2 from 45.4 in October. In China the Purchasing Managers’ Index climbed 50.6 and in Russia it expanded for a 14th month.

American automakers are a source of strength among manufacturers. Ford Motor Co. today reported a 6.4% increase in November sales from a year ago, exceeding analysts’ estimates of a 2.4% gain.

“November represented a strong month for the industry, and Ford sales performed well across the board,” Ken Czubay, Ford vice president of marketing, said in a statement.
Dearborn, Michigan-based Ford also said that it is planning to build 750,000 vehicles in the first quarter, up 11% from the same three months this year.

Replacement demand from owners of damaged vehicles and purchases deferred by Sandy, which slammed into the East Coast on Oct. 29, probably boosted U.S. car and light-truck sales in November to the best monthly pace in more than four years. The annualized industrywide light-vehicle sales rate, adjusted for seasonal trends, may have accelerated to 15 million, according to the median estimate.

Estimates for the Tempe, Ariz.-based group’s ISM index from the 83 economists surveyed ranged from 49 to 53.5. The gauge averaged 55.2 in 2011 and 57.3 a year earlier.

The ISM’s index of U.S. new orders dropped to a three-month low of 50.3 in November from 54.2. The gauge of export orders contracted for a sixth straight month. The employment index decreased to the lowest level since September 2009.

Other regional manufacturing reports showed weakness last month, much of it in areas hit by Sandy. Factory activity in the New York-area contracted in November for the fourth consecutive month as the storm knocked out electrical power and limited activity, disrupting about 70% of businesses that were surveyed by the Federal Reserve. Output in the Philadelphia-area shrank for the sixth time in seven months.

Seven of 12 Fed districts reported “either slowing or outright contraction in manufacturing,” the central bank said last week in its Beige Book business survey, which reflected information collected before Nov. 14. The Cleveland, Richmond and St. Louis areas said business was positive.

Five of 12 Fed districts expressed concern about next year’s outlook, partly due to the lack of clarity about the budget, the report said.

“Business levels are not bad,” Jerald Fishman, CEOat chipmaker Analog Devices Inc., said on a Nov. 27 call with analysts. Still, “there’s so much uncertainty out there in Europe and the U.S.”

Fishman said that because of a lack of clarity on government tax policies, “people are just standing still and that impacts their capital spending budget.”

The economy may rely more on housing as manufacturing slows. Construction spending climbed 1.4% in October, the most since May, after a 0.5% advance, the Commerce Department reported today in Washington.

The reading exceeded all 45 estimates in a Bloomberg survey of economists, in which the median projection was for a 0.5% increase. Home construction jumped to the highest level since November 2008.