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 Other data released on Tuesday showed a sturdy increase in
construction spending in October, which should help offset the drag
from manufacturing on fourth-quarter economic growth. With
manufacturing accounting for only 12 percent of the economy,
analysts say it is unlikely the persistent weakness will deter the
Federal Reserve from raising interest rates this month.
"Manufacturing is being pummeled by the stronger dollar and the
weakness of global demand, but the other 88 percent of the economy
continues to perform well. This won't prevent the Fed from raising
interest rates at the mid-December meeting," said Steve Murphy, a
U.S. economist at Capital Economics in Toronto.
The Institute for Supply Management said its national factory index
fell to 48.6 last month, the weakest reading since June 2009 when
the recession ended, from 50.1 in October. While a reading below 50
indicates a contraction in manufacturing, the index remains above
43.1, which is associated with a recession.
Factory activity has also been undercut by business efforts to
reduce an excessive inventory build, which is putting pressure on
new orders. The ISM said a gauge of new orders tumbled 4 percentage
points to 48.9 last month.
Inventories at manufacturers continued to shrink and their customers
reported stocks of unsold goods were too high for a fourth
consecutive month.
Ten out of 18 manufacturing industries, including apparel,
machinery, primary metals, electrical equipment, appliances and
components and computer and electronic products reported contraction
in November. Five industries reported growth.
Manufacturers cited dollar strength, slower Chinese and European
growth and lower oil prices as headwinds. Recent data on business
capital spending plans and factory output had offered hope that the
worst of the sector's woes were over.
But with auto sales and construction spending remaining robust early
in the fourth quarter, economists still expect U.S. gross domestic
product to expand at around a 2 percent annual pace, almost matching
the third-quarter pace.
Though November auto sales dipped to a seasonally adjusted
annualized 18.19 million-unit pace from October's brisk 18.24
million rate, according to Autodata Corp, they kept the industry on
track for record sales this year.
STRONG DOMESTIC DEMAND
"The good news is that the much more important services sector
continues to do very well, benefiting from solid domestic demand. In
that environment, the Fed will begin to raise interest rates at the
upcoming meeting," said Harm Bandholz, chief U.S. economist at
UniCredit Research in New York.
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Fed officials meet on Dec. 15-16 and are expected to raise benchmark
rates for the first time in nearly a decade.
Prices for U.S. government debt rose, while the dollar fell against
a basket of currencies. U.S. stocks ended higher.
In a separate report the Commerce Department said construction
spending increased 1.0 percent to a seasonally adjusted $1.11
trillion rate, the highest since December 2007, after rising 0.6
percent in September.
Construction outlays were up 13 percent compared to October of last
year. Spending in October was buoyed by a 0.8 percent rise in
private spending, which touched its highest level since January
2008. Outlays on private residential construction hit their highest
since December 2007.
Investment in private non-residential construction projects rose 0.6
percent to a near seven-year high, with spending on manufacturing
plants rising a robust 3 percent.
Public construction outlays jumped 1.4 percent to a five-year high
as a surge in federal government spending offset a dip in investment
by state and local governments.
"Despite the free fall in oil patch activity, total construction in
the rest of the economy is doing quite well," said Joel Naroff,
chief economist at Naroff Economic Advisors in Holland,
Pennsylvania.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci and James
Dalgleish)
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