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Decline in factory index accelerates

10% drop in October may prompt Fed cut

Bloomberg News / November 4, 2008
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WASHINGTON - Manufacturing in the United States contracted in October at the fastest pace in 26 years as more banks tightened credit and faltering economies abroad eroded prospects for American exports.

The Institute for Supply Management's factory index fell to 38.9 from 43.5 in September; 50 is the dividing line between expansion and contraction. The Commerce Department said separately that construction spending fell for the eighth time in 10 months in September.

Yesterday's report may add to pressure for further interest rate cuts and an additional federal package of tax and spending measures. The figures also showed the weakest level for US export orders in the two decades the ISM has kept the data, a sign of slowdowns in Europe and Asia.

"Manufacturing is definitely in a deep recession right now," John Lonski, chief economist at the Moody's Capital Markets Group in New York, said. "We're definitely going to have more rate cuts" and possibly "more in terms of fiscal stimulus."

A record share of US banks made it harder for companies to get loans in the past three months as they tried to avert losses from the financial crisis, the Federal Reserve said yesterday based on results of a survey of loan officers at domestic and foreign banks conducted Oct. 2 to 16.

The Tempe, Ariz.-based ISM's index was projected to drop to 41, according to the median of 75 economists' forecasts in a Bloomberg News survey.

The reading for October was the lowest since September 1982, adding to the series of dire economic news that has focused voters' attention ahead of today's presidential election. Figures last week showed consumer spending tumbled in September, capping the weakest quarter in three decades, while gross domestic product declined 0.3 percent in July to September.

October's ISM reading corresponds to a 0.7 percent annualized drop in GDP, the group said yesterday. The export gauge dropped to 41, the lowest reading since records for this component began in 1988.

"The domestic economy was already weak, and we were kind of hitching a ride on the overseas economy," said Brian Bethune, chief US financial economist at IHS Global Insight in Lexington, Mass. "That beacon of light from overseas economies has basically burned out."

European Commission officials yesterday said the region's economy probably entered a recession this year and will stagnate in 2009.

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