Factory Activity at Lowest Level Since Last Recession
Investor's Business Daily
October 1, 2008, 11:07 A.M. ET

Sharp declines in September factory activity and auto sales offered the latest evidence Wednesday that the credit crunch is having an impact on the real economy.

The Institute for Supply Management's manufacturing index dived to 43.5 last month from 49.9 in August. That's the lowest reading since October 2001 and the biggest monthly drop since 1984.

Readings below 50 suggest factory activity is contracting. Analysts had predicted 49.5.

"What we are looking at is a crisis of confidence," said Brian Levitt, economist and vice president at Oppenheimer Funds. "The credit crunch is taking hold of manufacturing and Main Street. If credit dries up, it affects consumer spending, expansion plans and, ultimately, jobs."

The production, new orders and jobs subindexes also fell sharply to multiyear lows.

Foreign demand has almost single-handedly kept the U.S. expanding, but that strength may be waning as the dollar rises and overseas economies stumble.

ISM's exports index fell 5 points in September to 52.0, a 2-year low.

"The credit crunch is affecting the entire developed world," said Levitt. "Europe is already in a recession, and that's one-third of our exports."

The ISM data may spur the Federal Reserve to resume interest rate cuts, analysts say.

"The data increase the odds of more Fed rate cuts, including the possibility of an inter-meeting cut," wrote Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co., in a note. "Extraordinary strains in the credit markets and the sharp plunge in commodity prices give the Fed additional leeway."

Continued dismal auto sales offer further justification for the Fed.

Ford's (F) September U.S. sales fell 35% vs. a year earlier. Toyota (TM) sales, until recently seen as all but immune to industry woes, sank 32%.

"Consumers and businesses are in a very fragile place," said Jim Farley, Ford group vice president of marketing and communications, in a statement. "An already weak economy compounded by very tight credit conditions has created an atmosphere of caution."

General Motors' (GM) sales fell "only" 16% thanks to its now-expired employee pricing promotion.

Meanwhile, construction spending was flat in August, the Commerce Department said. Residential building edged higher, the first increase in 17 months. But it still fell 27.9% vs. a year earlier. Private construction spending hit a 4-year low.

"The key point here is that the trend in construction spending is downwards and appears to be accelerating," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. "It is probably sensible not to take much notice of the August numbers in isolation, as they could be revised substantially."

More timely indicators also suggest housing hasn't bottomed yet. Loan applications to buy a home fell 10.9% last week to a 6-1/2-year low, the Mortgage Bankers Association said Wednesday. Overall mortgage applications sank 23%.

Two labor reports out Wednesday suggest more job losses and layoffs last month. Economists expect Friday's key employment report to show a drop of 105,000 jobs.

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