Friday, December 1, 2006

Economic weakness spread beyond the stricken housing and auto sectors last month, with reports showing U.S. manufacturing shrank for the first time in 31/2 years and construction dropped the most since the September 11, 2001, terrorist attacks.

U.S. industries broadly cut back production, adding to factory shutdowns caused by deepening recessions in auto- and housing-related industries such as wood, furniture and appliances, according to a report yesterday from the Institute for Supply Management.

An unexpected decline in construction of offices and other business facilities in October added to a record string of drops in housing construction of more than 1 percent in the last seven months to cause the biggest drop in construction spending in six years, the Commerce Department said yesterday.

“Industry is clearly going through a rough patch” that few anticipated, said Daniel Jester, analyst at Moody’s Outside housing and autos, the Federal Reserve had expected business to pick up rather than decline this fall, supporting a so-called “soft landing” in the economy.

The weakness in manufacturing started with autos, was compounded by housing, and recently has spread to big-ticket capital goods such as technology and telecommunications equipment, Mr. Jester said. In addition, a broad array of manufacturers are cutting back because of an unexpected buildup of inventories this fall that has to be worked off, he said.

“It is clear that several segments of the industrial base have weakened measurably over the past few months. This may now be spilling over to heretofore healthy segments related to business investment,” he said.

“The signal of declining production should not come as a surprise,” said Daniel J. Meckstroth, chief economist at the Manufacturers Alliance. “Two major manufacturing markets are declining — motor vehicles and housing — and many other industries are trying to adjust inventories to adjust for a period of much slower growth ahead in 2007.”

The “awful” collapse of the construction market in October means that sector is likely to be a major drag on economic growth for the fourth straight quarter in the final quarter of 2006, according to estimates.

David Wyss, economist at Standard & Poor’s Corp., noted that the downbeat tone of recent economic news contrasts sharply with upbeat assessments this week coming from Fed Chairman Ben S. Bernanke and other Fed officials. Mr. Wyss said there is cause for worry.

“Weak retail sales and a drop in consumer confidence in November create worries about the consumer,” he said, adding that “home sales and prices are dropping and the manufacturing sector appears to be retreating for the first time in over three years.”

While Mr. Bernanke and other Fed officials maintain that the economy can avoid recession even with the critical housing and car industries in decline, many economists disagree.

“Housing slowdowns tend to lead recessions rather than result from them,” said John Makin, economist with the American Enterprise Institute. “An annual drop in the growth rate of residential investment of more than 10 percent has coincided with a recession five of the seven times it has occurred since 1965.”

Housing, the biggest contributor to a halving of economic growth this year, plummeted at an 11 percent rate in the spring, 18 percent in the summer, and an estimated 9 percent in the fall.

“The intensity of the fall in U.S. residential investment during the middle two quarters of 2006 is approaching potential recession territory,” Mr. Makin said, but whether a downturn occurs depends on whether the Fed changes its stance and starts to cut interest rates.

Interest rates declined in the bond market yesterday in expectation that the Fed will reverse course and start cutting rates by March.

Roger M. Kubarych, economist with Unicredit Markets, said the Fed will reconsider its position at a meeting later this month. Mr. Bernanke signaled that the central bank is starting to become concerned about the housing market in a speech this week that for the first time designated a housing collapse as the biggest risk to economic growth.

“It seems the Fed is beginning to get nervous about the economic outlook,” he said.

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