Factory activity slows as economy stays sluggish

U.S. manufacturing grew more slowly in October, hampered by weaker demand for exports and slower production at factories.

U.S. manufacturing grew more slowly in October, hampered by weaker demand for exports and slower production at factories.

But companies ordered more goods, factories slashed their stockpiles and auto sales rose. Those trends suggest manufacturing activity could rebound in coming months.

Tuesday's data, which also showed a slight uptick in construction spending in September, point to an economy that is growing but remains too sluggish to lower the unemployment rate, which has been stuck at 9.1 percent for three straight months.

"Overall, economic conditions seem just about strong enough to avoid a recession, but not strong enough to generate any meaningful growth," said Paul Dales, senior U.S. economist at Capital Economics.

The Institute for Supply Management said Tuesday that its manufacturing index dropped to 50.8, down from 51.6 in September. Any reading above 50 indicates expansion.

Measures of production and new export orders fell. A gauge of employment dipped but remained strong enough to signal that factories are adding workers.

Separately, the Commerce Department said builders spent slightly more in September on projects, the second straight monthly increase. A gain in spending on home construction offset declines in government projects. Still, the annual rate of spending is roughly half the $1.5 trillion that economists consider healthy.

U.S. automakers reported stronger sales in October. That could lift manufacturing in the months to come. Sales are now back at the same pace they were before the March earthquake in Japan, which disrupted supplies and left many dealers with few popular models from Toyota Motor Corp. and Honda Motor Co.

Chrysler said its U.S. sales jumped 27 percent in October compared to the same month a year ago. Ford Motor Co. said its sales rose 6 percent, while General Motors Co. sales' were up 2 percent. Nissan and Hyundai reported big jumps in sales.

Honda and Toyota continued to struggle. Honda sales were unchanged; Toyota's dropped 8 percent.

Stocks plunged on worries that a planned referendum in Greece could derail a deal that European leaders forged last week to stem the region's debt crisis. The Dow Jones industrial average closed down 297 points for the day. Broader indexes also ended the day lower.

Europe's financial troubles have forced many nations there to cut demand for imported goods. That has affected manufacturing in the U.S. and also in China.

A report in China showed that manufacturing grew at the slowest pace in nearly three years in October, partly because of weak export orders.

"Manufacturing is feeling a chill wind from a generally weaker global economic environment, and this is unlikely to change anytime soon," said Joshua Shapiro, chief U.S. economist at MFR Inc.

Factories were among the first businesses to start growing after the recession officially ended in June 2009. The manufacturing sector has grown for 27 straight months, according to the index.

However, factory activity slowed this spring. Consumers cut back on purchases in the face of higher prices for gas and food. And the earthquake in Japan disrupted supply chains, which slowed U.S. auto production.

Despite slower growth in U.S. manufacturing, economists were encouraged by details in the ISM report.

An index measuring new orders rose to 52.4, the first time it has topped 50 in four months and the highest reading in six months.

Manufacturers also said their stockpiles fell sharply. That means that factories will have to boost output to meet any increase in demand.

"The combination of rising new orders and declining inventories is generally a favorable forward-looking indicator," said Michael Feroli, an economist at JPMorgan Chase.

And the prices that manufacturers paid for raw materials fell sharply, indicating that inflation pressures are dissipating. The prices index plummeted from 56 to 41, the lowest point since April 2009.

Bradley Holcomb, the chair of the group's survey committee, said the report reflects "positive relief from raw materials pricing and continuing strength in a few industries, but there is also more concern and caution about growth in this uncertain economy."

The export orders index dropped from 53.5 to 50. A reading of 50 means the order level is unchanged.

Stronger manufacturing would help boost hiring, which also weakened this spring.

Employers added only 103,000 jobs in September. The unemployment rate stayed at 9.1 percent for a third straight month.

The government releases the October employment report Friday. Economists forecast that employers added 100,000 jobs last month and unemployment remained stuck at 9.1 percent.

The ISM is a trade group of purchasing managers based in Tempe, Ariz. It compiles its manufacturing index by surveying about 300 purchasing managers across the country.

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