Global Markets Fall Again on Fears About U.S. Economy; Manufacturing Recession

Global Markets Fall Again on Fears About U.S. Economy

By KEITH BRADSHER and MARTIN FACKLER 16 minutes ago

Stock markets fell sharply across most of Asia again today and continued declining in Europe, as investors worried about the drop on Tuesday in American stock indices.

• Chinese Investors Shrug, and Shanghai Rallies 6:55 AM ET
• Slide Adds to Concerns About Economies | Leonhardt: Manufacturing Recession

U.S. manufacturing expected to take hit

Recession fears grow

Peter Morton

National Post

Thursday, December 28, 2006

Washington Bureau Chief

WASHINGTON - The key U.S. manufacturing sector is expected to be hit hard next year, heightening fears a recession is now much more likely than many economists had expected.

In its annual forecast, the U.S. National Association of Manufacturers said yesterday it expects factory output to slow to a mere 2.8% increase in 2007, compared with a more-robust 4.5% growth in 2006.

"The economy enters 2007 in a weakened state and a number of shocks could trigger a recession or near-recession economy," said Ethan Harris, U.S. chief economist for Lehman Bros., who pegs the possibility of a recession at 20% or higher.

David Berson, chief economist of U.S. government-backed mortgage-financing firm Fannie Mae, said he is doubtful the U.S. economy will slip into a recession in 2007, "but the risks have risen."

"Some of the Christmas spending wasn't as strong as we'd hope," Mr. Berson said. "I think we have not reached the bottom in housing yet."

David Heuther, the association's chief economist, said he believes manufacturing expansion had likely hit "a cyclical peak in the pace of growth" last year, but that the weaker U.S. dollar was helping boost U.S. exports. That, in turn, could soften the blow.

"After slowing to a 'below-potential pace' in recent quarters, the economy will continue decelerating toward a soft landing in the coming year," Mr. Heuther said, adding he expects the U.S. Federal Reserve to cut its key overnight lending rate by 50 basis points over the next 12 months to 4.75% from 5.25%.

Mr. Heuther's views are similar to those of other economists in the manufacturing sector -- it represents about 20% of total U.S. economic activity -- who feel the slowing housing market and soft automobiles sales will contribute to a sluggish start to the New Year.

Paul Kasriel, chief economist with the Northern Trust in Chicago, said yesterday he sees the chance of a recession as high as 45% unless the U.S. Federal Reserve moves quickly to cut short term interest rates.

"The goods-producing sectors -- manufacturing, construction -- still represent 45% of [gross domestic product]," Mr. Kasriel said.

"These are the part of the economy that move before the economy as a whole goes into recession and right now they're moving south."

One key gauge will come early next week when the U.S. Institute for Supply Management releases its December report on the manufacturing sector. The ISM's manufacturing index for November showed the sector had its first month of contraction since April, 2003.

Most economists expect the impact of slowing housing and energy prices to cut economic growth during the current quarter to 1.9%. But they are also calling for some rebound, with an overall growth rate of 2.3% in 2007. That should pick up to 3% by 2008.

That view is tempered somewhat by the soft retail sales during this key Christmas holiday spending season and the lingering slump in U.S. housing sales.

However, the latest numbers in the housing market show a surprising rebound in new homes sales in November as U.S. homebuilders unloaded stalled inventories.

The 3.4% increase in home sales was nearly double what economists had predicted. Meanwhile, the supply of unsold homes fell to the lowest level since May.

"We might not be at the bottom [of the housing slump], but we're getting very close to it,'' said Jason Schenker, an economist at Wachovia Corp. in Charlotte,N.C.

Financial Post pmorton@nationalpost.com

© National Post 2006

US manufacturing shrinks for 1st time in 3-1/2 yrs

UPDATE 2
Fri Dec 1, 2006 11:36 AM ET

(Adds ISM survey chairman's comments paragraphs 10-12)

By Lucia Mutikani

NEW YORK, Dec 1 (Reuters) - U.S. factory activity shrank in November for the first time in 3-1/2 years as new orders, production and employment fell and prices paid rose, according to a survey published on Friday.

The data were seen as further evidence that growth in the U.S. economy is slowing, which could force the Federal Reserve to cut official interest rates in the first quarter of 2007.

The Institute for Supply Management said its index of national factory activity dropped to 49.5 from 51.2 in October, below economists' median forecast for a slight rise to 51.5.

This was the first time that the index had fallen below 50 since April 2003, when a reading of 46.5 was recorded. A reading below 50 indicates shrinkage in the factory sector.

"I think this number will definitely continue to fan fears of a hard landing for the U.S. economy. Overall, this is consistent with the view that the U.S. economy is moderating and could prompt a Fed rate cut in 2007," said Omer Esiner, a senior analyst at Ruesch International in Washington, D.C.

Government bonds rallied on the data, with the yield on the benchmark 10-year note falling to a fresh 10-month low of 4.41 percent. Yields move inversely to prices.

Federal funds interest rate futures indicated that markets are pricing in a 64 percent chance of a Fed rate cut in the first quarter, up from 52 percent factored in before the data.

The dollar extended losses on the data, slumping to a 20-month low against the euro and diving to a 14-year low against the British pound .

The U.S. central bank has kept the benchmark overnight fed funds rate steady at 5.25 percent since August, having raised it by a quarter percentage point 17 times in the two years to June.

ISM's manufacturing survey committee chairman Norbert Ore said that despite the index's drop below 50, the manufacturing sector in the world's largest economy was far from recession.

"According to our data, I would define a manufacturing recession as being six consecutive months or two consecutive quarters below 50," said Ore.

"I don't see situations that would drive us way below 50 into a deep decline in the economy. It seems more like the soft landing effect that many have talked about."

The ISM's prices paid index, which measures inflationary pressures in the factory sector, climbed to 53.5 in November, from 47.0 in October.

New orders, a gauge of future growth, declined to 48.7 -- falling below 50 also for the first time since April 2003 -- from 52.1 and the employment index slipped to 49.2 in November from 50.8.

(Additional reporting by Ellen Freilich)