A measure of U.S. manufacturing activity fell to a 26-year low in November as new orders fell for a twelfth straight month, a trade group said Monday.
The reading of 36.2 from the Institute for Supply Management's monthly survey of manufacturing activity was below October's 38.9. It was also worse than Wall Street economists' expectations of 38.4 as measured by a survey by Thomson Reuters.
A reading below 50 indicates the sector is contracting.
The ISM says the November figure is the lowest since May 1982 when the economy was in the midst of a painful recession.
Separately, the Commerce Department said construction spending dropped by 1.2 percent in October, much bigger than the 0.9 percent decline that many analysts had expected.
The weakness was led by another sizable drop in home construction, which has fallen every month but two over the past two and a half years. Nonresidential building also weakened as developers face tougher times getting financing because the banking system is going through a severe credit squeeze.
The reports did little to boost investors already uneasy about the holiday shopping season and the Dow Jones industrial average fell about 380 points in midday trading.
The construction weakness was led by another sizable drop in home building, which has fallen every month but two over the past 2½ years. Nonresidential building also weakened as developers face tougher times getting financing because the banking system is going through a severe credit squeeze.
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said construction of hotels and motels looked particularly vulnerable going forward given the boom in this area in recent years. But he said numerous areas of nonresidential activity from manufacturing to commercial, office and retail also were at risk given the extent of the slowdown in the economy.
Friedman, Billings, Ramsey analyst C. Patrick Scholes said in a client note last month that he expected fourth-quarter revenue per available room to be worse than expected, and predicted that companies such as Marriott International Inc., Host Hotels & Resorts Inc. and LaSalle Hotel Properties may miss their quarterly earnings outlooks. Revenue per available room, also known as revpar, is a key gauge of a lodging company’s performance.
Economists believe the construction industry will be facing severe troubles until an economic recovery is firmly launched, probably not until the second half of 2009.
These analysts believe the country has slipped into what could be the worst recession since the 1981-82 downturn. The current economic slump is being worsened by the most serious financial crisis to hit the country since the 1930s as banks struggle to deal with billions of dollars of loan losses, beginning with troubles with mortgage debt that reflect a record level of foreclosures.
Housing construction, which has been in a slump for more than two years, fell by 3.5 percent in October following a 0.5 percent drop in September. Private residential building activity, which totaled $338.8 billion at a seasonally adjusted annual rate in October, has managed increases in only two months over the past 31.
D.R. Horton Inc., a Fort Worth, Texas-based home builder, last week reported a nearly $800 million loss in its fiscal fourth quarter, reflecting in part slower home sales. Other reports last week showed that sales of new homes in October dropped 5.3 percent to their lowest level in nearly 18 years, while sales of existing homes fell a bigger-than-expected 3.1 percent in October.
The Commerce Department report Monday also showed that nonresidential construction dropped by 0.7 percent in October, the third decline in the past four months, leaving activity at a seasonally adjusted annual rate of $417.7 billion. Nonresidential activity had been an island of strength in the midst of the steep downturn in housing, but that area has begun to weaken because of the severe credit squeeze, which is making it harder for developers to get financing.
Government building projects did show strength in October, rising by 0.7 percent to an annual rate of $316.1 billion. State and local construction was up 0.3 percent to a rate of $291.1 billion, while federal construction activity totaled $25 billion at an annual rate, an increase of 5.5 percent from September.
The Bush administration got Congress to pass a $700 billion financial system rescue package on Oct. 3, but many economists believe the bailout won’t keep the country from undergoing a prolonged recession, a development which could make it even harder for the construction industry to mount a sustained recovery.
Manufacturers also have been hit hard by the housing slump and financial crisis, which have led to cutbacks in business and consumer spending.
Deere & Co., which makes agriculture and construction machinery, has seen its profit fall amid the economic downturn. The Moline, Ill.-based company said last week that its fourth-quarter earnings fell 18 percent and it forecast that profit will drop by 7 percent in 2009.