The NAPM index uses 50 percent as a break-even point, with anything above signaling economic growth and anything below indicating contraction. The index is closely watched because it is the first national reading for October on U.S. manufacturing performance, a key economic sector. October marks the third straight month of contraction after 18 months of growth. Although the index had fallen at various points during that period as the rate of growth fluctuated, August was the first month since February 1999 that it had dropped below 50 percent. ``There are few signs of encouragement in this month's report,'' said Norbert J. Ore, who oversees the monthly tabulation for the Tempe, Ariz.-based NAPM.
"Manufacturing is still feeling the effect of higher interest rates, higher energy prices, and the strong dollar," he added. "Though prices still remain firm in most market, with the exception of some metals, the manufacturing sector in general appears to be losing momentum faster than the overall economy."
Despite the manufacturing numbers, the NAPM said that the overall economy continued to grow in October for the 114th consecutive month. The NAPM report attributed much of the slowdown in its purchasing index to decreased production, a decline in new orders and rising prices. Manufacturers got less new business in October as the new orders index contracted for the fourth consecutive month and while new export orders fell after 20 straight months of growth.
Economist David Orr said this report could prompt the Federal Reserve Board to leave interest rates unchanged and to ease its warnings of inflation when it next meets on Nov. 15. The Fed, which has been concerned that the economy was growing out of control and was threatening to spur inflation, has raised interest rates six times since 1999. While it hasn't raised rates since May, in October it warned that higher energy costs pose the risk of "raising inflation expectations" in coming months.
"I think it is unlikely it is going to ease right away, but I think there is a fairly good chance that this report will help," said Orr, chief economist for First Union Corp. in Charlotte, N.C.
In a separate report, the Commerce Department said construction spending jumped 2.4 percent in September, the biggest gain in 10 months, led by strong increases in spending for home remodeling, office buildings and government projects.
An inventory glut in across manufacturing sectors is mostly to blame for the NAPM findings, said Sun Won Sohn, executive vice president and chief economist for Wells Fargo in Minneapolis. "Manufacturers are stuck with more inventories than they need and are in the process of shifting down their production plans," Sohn said. "This is a result of the doldrums in retail sales that we have been experiencing through the summer and the fall months."
This latest sign of a cooling economy doesn't bode well for upcoming holiday retail sales, he added. "The manufacturers are realizing that the world is not that rosy and have to scale back production."
To compensate for fewer orders, manufacturers produced less goods and hired or replaced fewer workers. Production dropped to 48.4 percent. Employment registered 47.9 percent in October, dropping from 50.9 percent in September. Meanwhile, manufacturers are still paying high prices for their goods with the price index at 56.5 percent, which is slightly lower than it was September.