WASHINGTON – U.S. manufacturing shrank in November to its weakest level since July 2009, one month after the last recession ended. Worries about automatic tax increases in the new year cut demand for factory orders and manufacturing jobs.
The Institute for Supply Management said Monday that its index of manufacturing conditions fell to a reading of 49.5.
Thats down from 51.7 in October.
Readings above 50 signal growth, while readings below indicate contraction. Manufacturing grew in October for only the second time since May. The ISM is a trade group of purchasing managers.
A gauge of new orders dropped to its lowest level since August, a sign that production could slow in coming months. Manufacturers also sharply reduced their stockpiles, indicating companies expect weaker demand.
Todays report suggests that the manufacturing sector is likely to remain a weak point in the recovery for a few months yet, Jeremy Lawson, an economist at BNP Paribas, said in a note to clients.
Stocks declined after the survey was released, giving up early gains.
The weak manufacturing survey overshadowed other positives economic reports. Greater home building boosted U.S. construction spending in October by the most in five months. Manufacturing activity in China grew in November for the second straight month. And U.S. auto sales rebounded last month after Superstorm Sandy held sales back in October.
U.S. manufacturers are concerned about the fiscal cliff, the ISM survey noted. Thats the name for sharp tax increases and government spending cuts that will take effect in January if Congress and the Obama administration fail to strike a budget deal before then.
Worries about the fiscal cliff have led many companies to pull back this year on purchases of machinery and equipment, which signal investment plans. The decline could slow economic growth and hold back hiring in the October-December quarter.
A measure of hiring in the ISM survey fell to 48.4, the lowest reading since September 2009.
Companies are just backing off and not making any moves until things clear up a bit, said Bradley Holcomb, chairman of the ISMs survey committee.
Consumers also appear nervous about higher taxes. Economists cited the fiscal cliff as a key reason consumer spending fell in October by the most since May.
Construction spendingBig picture: U.S. builders increased their spending on construction projects 1.4 percent in October, the biggest increase since May, the Commerce Department said Monday.
Homes drive gains: Spending on housing construction jumped 3 percent to drive the overall gain. Spending for non-residential projects, such as hotels and shopping centers, rose only 0.3 percent, while government projects increased 0.8 percent.
Outlook: Construction spending climbed to an annual rate of $872.1 billion in October, nearly 17 percent above its low hit in February 2011. But even with the gain, it remains at just half the level considered healthy.